Looming higher rates — and now, the looming run-off of the Fed balance sheet — have finally begun to penetrate market consciousness, with the result that the sell-off which had been happening “under the hood” spread more widely and visibly to the major indices. As usual, the median stock has fallen considerably more than an index-watcher would think. We would prefer to see certain thematically compelling names in tech fall further before we would see really attractive opportunities emerging. In any event, what is happening is a normal, natural, and healthy reaction of a highly overbought market to a bucket of cold water courtesy of the Federal Reserve. The average early-year decline after a year as strong as 2021 is in the area of 5–6%, so we would say that this correction is not surprising. We are being patient, and we are focused on attractive opportunities in tech and tech-adjacent sectors and industries — particularly advanced semiconductors, battery technology and battery minerals, and long-term disruptive entrants in healthcare, business digitization, and cybersecurity. Tactically, we are interested in automobiles, particularly some cheaper Asian manufacturers.
A rising-rate environment is structurally positive for banks, and we have added several to our watch-list to follow during earnings season. Tactically, some European and Asian banks may be of interest.
Earnings season begins tomorrow, and the markets’ “noise level” is about to increase, in case you didn’t think it was already loud enough. Our greatest focus is the direction of earnings. This earnings season will be critical to watch — as usual, particularly to hear what companies have to say about their outlook. Markets were driven last year by earnings growth. Looking back over the decade since the Great Financial Crisis, we see that markets produced positive returns even when financial conditions tilted to the tightening side — as long as earnings growth remained robust. If earnings growth flattened out, the market followed suit. Therefore we are watching closely to see what the current earnings season will suggest about whether we have passed peak earnings growth. The pandemic fiscal and monetary response may have pulled forward a good deal of earnings growth and compressed it into 2020 and 2021. If that proves to be the case, 2022 may provide a rather different environment — especially if domestic U.S. political trends suggest that a regime in change in one or both houses of Congress is in the offing for November.
We remain long-term positive on gold. We see that the declines in bitcoin and some critical DeFi ecosystem assets are attracting late-to-the-party institutions — so we expect a bottom to be found.
Thanks for listening; we welcome your calls and questions.
