Stock markets have had the strongest rally in history since March 2020, when they crashed due to the coronavirus breakout. But, when central banks and governments around the world launched the biggest recovery program ever, they backfired and dumped trillions of dollars/euro into the markets.
This has helped keep the stock market bullish for almost two years, but as inflation spirals out of control, central banks have begun to tighten their monetary policies. As you can see in the chart above, with the S&P 500 trading now close to the 100 daily SMA, it is weighing on the stock markets. The stock markets are suffering some heavy losses due to the downfall of tech companies.
google daily chart
Could the 200 Daily SMA Stop the Big Downfall in Google?
If you recall from last week, the minutes of the Fed meeting showed that the Fed is not only looking to extend the taper (it will be completed near the end of the first quarter), but also looking to raise rates in 2022. (The Fed anticipates three rate hikes), but they are also looking to shrink the balance sheet. What does it mean as far as numbers go?
I talked about it last week, assuming that the Fed would begin by allowing mature holdings on the balance sheet to roll-off without changing the amounts. This weekend, the focus was on taking a step forward by outright selling holdings (ie quantitative tightening or QT).
When the Fed chairman spoke of having tools to slow inflation, selling Treasuries on the balance sheet would certainly boost interest rates and potentially slow inflation. Markets will get to hear the Fed chair tomorrow during his reappointment testimony before the Senate Banking Committee.
Certainly, one issue in this economic and COVID-hit cycle is the supply chain, which is keeping inflation high.
What we saw in the employment report is an offshoot of that problem. Remember that the report showed low job gains, but the unemployment rate dropped sharply, as people are dropping out of the workforce. Baby boomers are reaching retirement age, and are retiring one after the other, and that’s a problem. We may be close to full employment with 10-11 million jobs needed (as per JOLTS Jobs report).
What will be the solution?
After driving to McDonald’s and taking your order electronically, the burger and fries and the rest of the order are put together, bagged and even delivered electronically. Restaurant food and drink orders are being taken entirely from your cell phone, and are probably being picked up versus being delivered to your table.
Trucking is being done with autonomous drivers. There will be a trend towards fewer workers, as the work will be done autonomously. Of course, we’re not there yet. Right now there is a shortage of chips, but the infrastructure is being built. However it will take time, which can be a problem and in the meantime it can cause all kinds of volatility. It is impossible to gauge how all this plays out in the equity markets.