Staying Nimble
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Investors,
Yesterday’s newsletter was predominantly focused on the macroeconomic themes that are impacting financial markets, notably how receding liquidity is creating a domino effect of failures in the cryptocurrency industry. Considering that crypto is the most risky asset class vs. traditional asset classes, it’s very possible that these crypto failures are a canary in the coal mine. However, we won’t know if the ripple effect & tidal wave will impact traditional markets until we have the benefit of hindsight.
I’m not trying to stoke fear, though I certainly believe that investors should be extremely cautious. I’m not capitalizing on the moment either, as I warned in my “Investment Outlook for 2022” that aggressive monetary tightening would create headwinds for asset prices:
“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.
Did I foresee this exact financial market environment? No, but I did my best to warn about the impact of monetary tightening & receding liquidity. Monetary dynamics still present headwinds today, in addition to micro factors that could influence individual asset classes and/or securities:
The Federal Reserve is still raising interest rates, even if the market expects for the pace of rate hikes to decelerate.
The Fed has started to reduce the size of their balance sheet, but I expect them to accelerate these efforts in 2023.
Contagion events are getting larger, though they’ve been contained within the crypto industry thus far in the United States.
The stock market shrugged off these concerns on Thursday & Friday, generating a handsome weekly return; however, my general sentiment is that investors should view this as another opportunity to reduce market risk. Specifically, I’ve been advocating all year that investors should reduce risk to non-core portfolio holdings, raise cash, and dollar-cost average into long-term, core portfolio holdings. With the market launching higher, it’s possible that we will continue to gain upside momentum. On the other hand, it’s possible that this momentum fades and produces new YTD lows akin to each market rally so far in 2022.
The analysis below will cover the intricacies of market dynamics that unfolded this past week in the stock market. Of course, we will also analyze different statistics and price structure that I’m seeing in crypto! In total, I’ll be sharing 8 charts that are most appropriately describing current market conditions & potentially highlighting where stocks & crypto will go next.