That “Something Else”: This Is It

We have been talking about the extreme overvaluation of the equities markets for several months now.  That would normally imply that any hint of interest rate increases from the Federal Reserve should start moving these markets downward, much as what happened in mid-to-late 2018. 

In November of 2021, the Fed clearly telegraphed their intentions to wind down their asset purchases and begin hiking interest rates.  In December, just as we predicted (based on employment and inflation numbers), the Fed accelerated their plan, thereby setting March of 2022 as the end of their asset purchase program, and the date of the first-of-a-series of interest rate hikes.

Neither of those announcements could break the upward momentum of equities, and by the very end of 2021, markets hit new index records.  In our December and January reports, we said this about the lack of downward conviction in the indices:

“Something else must serve as a trigger for a deeper correction…”

In our estimation, retail investors were not taking the imminent moves by the Fed seriously, even as smarter money had started to head for the exits (as shown by margin borrowing topping out and then retreating slightly).  So, “something else” would have to provide a push, something of greater concern, to knock the markets down from their lofty heights.

In February, Vladimir Putin began first to amass Russian military forces along multiple points of the Russian-Ukrainian and Belarus-Ukraine borders, with the clear intent of intimidation and eventual invasion of Ukrainian territory, an action that would be the largest military operation in Europe in over 75 years. 

THAT finally put some sobriety and solid fear into the equities markets, which have been moving downward with more conviction through the latter half of February.  The only relief from that downward trend has been on rumors that the conflict would be resolved quickly (it will not), or that the Federal Reserve may now temper or even delay their interest rate hike plans.

Near Term Interest Rate Policy

Our stance on the matter of the Fed’s intentions is simple: They have no real reason to temper or delay, and because of low unemployment coupled with persisting high inflation, they simply MUST begin their program on time, and also with conviction. 

As such, look for an initial hike in March, of 0.25 to 0.50 percent, as well as announcements of further scripted increases throughout 2022.

Finally, if you are not yet a member of Advanced Projections Macro-Economic Reports and Recession Warnings, you can get Free Access today.

For more pertinent updates, stay tuned via the AP Newsroom on YouTube.