The first full week of the new year showed market optimism. All four of the components I track rose as summarized in the following table:
|ASSETS||7/26/2022||Last Week||This Week||Week||From 7 to 26|
That all items rose for the week should not cause optimism. The correction from the credit-induced boom created by the Federal Reserve continues and has a long ways to run. Stock values and real asset allocations are seriously out of line because of excess liquidity. These are in the slow and painful process of correcting.
A recession (which already has occurred according to the prior definition of two consecutive down quarters) should become painfully obvious this new year.
The week was surprising in the sense that Bonds performed so well. Such performance suggests market expectations of Federal Reverse stopping or even reversing its hard line against inflation. While anything is possible in the world of politics (which ultimately determines Fed action), the world of economics suggests it is too premature for these expectations. Inflation is still too high and would likely re-accelerate if the Fed were to ease off.
A Republican House may make it more difficult for extreme spending to continue, but politicians will continue to spend beyond tax revenues.
The week provided positive performance, but results since July 26, 2022 are consistent with expectations stated when the tightening began. Bonds and Tech have suffered most (and this is likely to continue until and unless the Fed throws in the towel) and Gold (or hard assets) has outperformed. The Dow has outperformed my expectations, although it has benefited as a temporary port in the storm for funds leaving higher risk Tech assets. Moving funds from the QQQ into the DJIA reduces risk while still allowing the game to continue. At some point the Dow declines, removing it as a “haven.”
Nothing has changed regarding my opinion of these four asset classes and the economics of this economy. More pain lies ahead, especially once the realization that the Federal Government is bankrupt (technically) and increasingly approaching insolvency. Movements already underway to replace the dollar as the world’s currency will make this clear. To the extent these movements garner support, things could deteriorate quickly.
This is not your grandfather’s stock market. Nor is it the political world he lived in.
Be very cautious!