by Jason Bodner

February 1, 2022

We all want to know when the pain and volatility in the market will end. The answer centers around the Fed. Fears of rate hikes started pressuring stocks last November. Uncertainty has continued to clobber stocks and cryptocurrencies. The headlines are squarely focused on inflation and interest rates.

I have a theory on how this will all play out – and it’s not like anything the pundits and media are saying. I’ll give you my playbook here, based on my data analysis and on when I think this choppiness might end.

THE SETUP: Basically, the Fed needs to cool off the rate of inflation without wrecking things. That requires walking a policy tightrope: If they are too conservative, we fall into a recession; if they are too liberal, they could cause hyperinflation.  That’s why every investor has all eyes and ears on the Fed.

I think the Fed has already begun cooling the economy without us even noticing it. In fact, I think the current sell-off was engineered, mostly by the Fed. First, two years ago, due to COVID-19, the Fed had to float the economy with stimulus aid – like Economic Injury Disaster Loans (EIDLs), payroll protection, and unemployment insurance. They also dropped interest rates effectively to zero. Stocks responded by rallying from depths to new highs… all while we were staying home. How do I know this? Robinhood reported tons of $600 and $1,200 deposits, matching the stimulus check amounts. Crypto also soared.

In other words, people stayed home and bought risk assets. Leverage also grew. Low rates and plentiful money make assets go up. Hedge funds and traders who want to beat a rising market often use leverage.

For most of 2020, people weren’t working. Factories shut down. Trucking dropped off. Supply chains crunched. And we’re still feeling effects today. Here’s the simple equation of what happened in 2020:

  • 1 – Low supply and high demand for anything means prices go up.
  • 2 –Oodles of cash in the system means asset prices go up.
  • 1+2 = 3 – Oodles of cash chasing short supply means prices go way up.

As a result, we now have 7% inflation. That’s a problem. Paychecks suddenly don’t stretch as far as they once did. And with the 10-year Treasury yielding roughly 1.8%, investment capital is getting eaten up by inflation’s invisible tax. That’s why investors were chasing assets they hoped would rise by double digits.

So how do we stop inflation? The simple answer is that the Fed must tighten money supply by stopping quantitative easing, and by raising interest rates. But that is not enough. The problem is the U.S. issued so much debt and expanded the balance sheet so much, that the Fed must be careful how it raises rates. Raise too fast, and interest on our federal debt could become crippling. Raise too high, we could get a recession.

But raise too little, and inflation rages on. That’s the Fed’s dilemma.

SOLUTION: TAPER TANTRUM 2.0: To fight inflation, the Fed must take some money out of the system. But if the Fed can’t raise rates too high, what can it do?  One way is to reduce asset prices.

One way to do that is to cause a market correction. They did that through Taper Tantrum 2.0. The Fed released its December meeting notes indicating that it might accelerate money supply tightening. Nothing had actually happened yet, but merely mentioning possible faster tightening torpedoed stocks and crypto.

Merely by indicating future tightening, the Fed knew it could shake the markets. Sure enough, investors slowed buying stocks and crypto because they didn’t know exactly what the Fed would do, or when.

The Fed got help from big banks, too. The Fed indicated three rate hikes in 2022, but Goldman Sachs predicted four rate hikes in 2022. Last week, it upped its estimate to five or more.  JPMorgan’s CEO Jamie Dimon said we could expect wicked volatility through the summer, and “if we’re lucky,” the Fed might engineer a soft landing. These statements by leading bankers shook investor confidence even more.

With fewer investors buying stocks, the major indexes sank because algo-traders and short-sellers try to force stocks down. As cracks appear, the selling cascades. Cryptocurrencies fell sharply as well.

Suddenly, most asset prices are falling. People see red in their brokerage, 401(k), and crypto accounts.

The next step is that people suddenly think twice about spending on any marginal items:

  • “Maybe we don’t need that vacation after all.”
  • “Maybe I can wait to buy that new big TV.”

Lack of buying consumer items means inflation starts cooling, as the money supply has started receding.

And guess what? The Fed hasn’t hiked short-term rates even ONCE yet!

Risk-off selling also removes some leverage. Investors who levered up suddenly face sharp declines. Margin calls come, causing even more selling.

Is This Timing Coincidental, or Part of a Plan?

This market bubble-prick comes at a curious time: The Omicron variant of COVID has peaked. The hospitalization rates are slowing. Government aid and benefits are mostly turned off. None of that good news registers when traders are in fear mode and their portfolios have tanked. Those on the sidelines can only think, “The party’s over,” so people will have to get jobs. (Where else does money come from?)

As labor shores up and the virus threat dwindles, supply issues will begin thawing over time. That should cause prices to fall more. That leads us to the next logical question: What will the Fed do from here?

Goldman Sachs expects five rate hikes this year and Jamie Dimon expects a soft landing “if we’re lucky.”

Remember that these two organizations are very close to government bailouts in the past. Who was in charge of TARP during the 2008 global financial crisis? Hank Paulson, a Goldman Sachs CEO before he became Treasury Secretary. And the original J.P. Morgan bailed out the U.S. government in 1893 and the market in 1907. Old Man Morgan essentially was the Fed before there was a Fed. Might these institutions once again act as agents spreading the Fed’s message to ‘greedy investors’ to cool their speculative ways?

I think so. And all that’s left is for the Fed to cautiously enact a few rate hikes to keep things in check.

But let me assure you… The Fed won’t raise rates five times, or even four. In fact, the Minnesota Fed chairman is on record expecting only two hikes this year, and he worked on TARP! The Fed’s soft-landing is nearly guaranteed. All it had to do was prick the bubble, to start assets falling at the right time.

That means we shouldn’t worry about stocks. Earnings season is here, and most companies’ numbers are stronger than expected.  That should help to calm volatility. We may not immediately go back to new highs, but quality earnings will quell the slide. As for what will fuel stock rallies, it comes to timing.

The Fed wouldn’t start any “ghost tightening” without a solid setup. The Fed has aided and rescued the economy so often for years, even decades, why would it derail us now, as the pandemic winds down?

Listen: Companies are doing phenomenally well, and they should continue to do well. And stocks have weathered far, far worse attacks than fearing tighter rates. In time, the market will digest the Fed’s less aggressive action and resume an uptrend. Then, of course, headline writers will find other fears to stoke.

When Will the Pain End? – I’ll Set a Date!

As for when this slide will conclude, I turn to the data yet again. On March 8th of 2020, I predicted that stocks would bottom on Friday, March 20th. The Dow Jones did exactly that, and the S&P 500 bottomed out just one trading day later, on Monday, March 23rd.  I made that prediction by looking at the selling of stocks since 1990, finding that the average market bottom happened 21 calendar days after severe selling.

Here was the data from that March 8th article:

MAP Signals Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Applying that same study, plus a new one, to the current extreme selling conditions, I can predict a low on.

Friday, February 11th, 2022

Here is the data from our newest study:  Both tables have a lot of numbers but here’s what I look for:

The market will likely bottom on February 11th. And once it does, historically speaking, forward returns are spectacular.  Just look at all the green covering the right side of this table!

MAP Signals Table 1

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

CONCLUSION: The Fed has let the market correction do its heavy lifting, so the Fed can now go slow.

This is my theory of the Fed’s “ghost tightening,” which means that things will be just fine. The current volatility is painful, but in the words of Lewis “Chesty” Puller: “Pain is weakness leaving the body.”

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

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Since When Did “Grow Rich” Become Four-Letter Words?

Global Mail by Ivan Martchev
January Reflects Powell’s Influence in the Stock Market

Sector Spotlight by Jason Bodner
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Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.

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