Edition #173

Premium Market Analysis

Investors,

While I’ve been proud to see market dynamics unfold in a manner similar to my forecasts, these market conditions have been extremely disheartening. It’s never a fun or enjoyable experience to see the Nasdaq-100 index fall more than -22% in the span of 18 weeks, but this is the environment we are in today. Regardless of how much we kick or scream, the market will unravel as it will, with investors often being unwilling to accept that the prior “up-only” phase of the market is no longer intact.

This is the regime we are facing today.

In December 2021, when writing my “Investment Outlook for 2022”, I recognized that we were departing from the goldilocks phase of bull market and were likely to face underwhelming market conditions. I still had some idealism, placing a 20% chance for above-average performance. At the time, the Federal Reserve wasn’t even remotely as hawkish as it is today and I didn’t foresee such a dramatic shift in their rhetoric. Still, I highlighted an aggressive Fed as one of the primary risks to the market in 2022:

“I’m reducing my optimism for U.S. stocks in 2022, most appropriately described as cautious optimism. In the event that monetary policy remains accommodative for longer than we currently expect, I believe asset prices could continue to generate stronger-than-expected returns. Conversely, if the Fed is forced to tighten monetary policy more hastily, caused by relentless inflationary pressures, I believe asset prices could face worse-than-expected returns.”

I diagnosed the issue properly, giving an accurate prescription, but still maintained hope that the patient would be resilient with minimal treatment. Since then, the diagnosis has worsened, with the Federal Reserve posturing into a more aggressive stance in light of historic & relentless inflation. As the year has progressed, I’ve become increasingly cautionary, following the systematic approach I outlined in my 2022 outlook.

Unfortunately, this is the environment that we are in today: one in which 3 of the 4 stock market indexes are down double-digit percent in 2022. During the entirety of the drawdown, I’ve shared my perspective that long-term investors shouldn’t be overly concerned about market pressure, but should certainly reconsider their risk tolerance, portfolio constructions, and core convictions.

In today’s premium analysis, I’m going to discuss more of these topics and attempt to give more clarity on my current diagnosis of market dynamics. We’ll discuss macro factors impacting global liquidity & financial markets, under-the-hood metrics for the S&P 500, relative performance of tech vs. value, and interesting Nasdaq data. Let’s dive right in…