As we peer into 2022, we first want to reiterate that it’s our opinion that the next few years will quite possibly be the most fertile ground for trading opportunities since the late 1990s. The reasons for this unabashed optimism are anchored by the following four catalysts:
1. The change in Fed policy.
This by far will be the largest catalyst for volatility in 2022. Since 2009 the Fed and the rest of the world’s central bankers have flooded the world with easy money and historically low interest rates. But inflation levels in 2021 have changed their ability to saturate the world with more printed money. Chairman Powell turned tough in congressional testimony in November and reiterated that stance in the FOMC meeting on December 15th. And while the tapering has been accelerated, the balance sheet still is being expanded – for now. Which helps explain the rise in equities into year end. But 2022 is setting up to be the first year since 2009 in which there is a marked change in Fed policy, including a complete reversal of easing and the beginning of a tightening cycle.
Keep in mind that the current Fed balance sheet has more than $8.75 trillion worth of assets, up from a semi-recent pre-pandemic low (September 2019) of $3.67 trillion, and a pre-financial crisis low (2009) of less than $1T. That is almost $5 trillion worth of assets that have been tacked on since the pandemic and now, theoretically, are ready to come off and not cause any dislocations?
The last time the Fed attempted to shrink the balance sheet and raise rates in 2018, we had a major dislocation in the stock market that forced Chairman Powell to succumb to the pressure and reverse course Christmas of that year. Is it different this time? Can they turn hawkish with trillions of debt sloshing around the globe issued at uber-low rates? It is a multi-trillion-dollar question that will affect every asset on the globe to some extent.
2. The hopeful aftereffects of the pandemic.
No one, especially us, knows how and when this pandemic will end, or at least descend into a manageable endemic. But if the current Omicron does indeed replace the delta variant and continues to exhibit less severe symptoms, then just maybe by the spring we can view this as a manageable situation with vaccines, therapeutics, and an increasing level of herd immunity. Fingers crossed. The question is what will a return to “normalcy” look like? What does it entail in regard to work schedules, travel, schooling, medical care, supply chains, shopping habits, and so on. The “reset,” if you will, is sure to provide ample trading opportunities as we all figure out how to live in a (hopeful) post-covid world.
Of course, there is always the possibility that a new more sinister variant can emerge. But we are going to end 2021 on a positive note and hope that Omicron is the last gasp from the pandemic.
3. Dealing with inflation.
The Fed was content with rates near zero as long as the CPI was printing 1.4% – as it was in early 2021. But now that same print is near 7% and rates are still near zero. So, either rates need to go higher (2.5%-3% on 10-year) to tamp down inflation which will send stock valuations (especially software) lower, or inflation needs to plummet back to the 1.5-2% range. Which seems highly unlikely. at least in 2022.
For years now commodity trading has taken a backseat to equity, derivative, and most recently crypto trading. But the pandemic led supply chain disruptions, combined with climate change, and the above-mentioned Fed policies have thrust commodities back into the forefront of traders’ minds. The fact that we may also be on the cusp of a super cycle (chart below) is just another reason to believe that commodities will provide another avenue of great trading opportunities in 2022 and beyond.
There are obviously more than four catalysts that will be significant in 2022. The mid-term elections and the on-going tension between China/Russia and the US are two that immediately come to mind. But the point is that 2022 is shaping up to be a year like we have not seen since the 2008 Great Financial Crisis. One thing is certain volatility will become the norm versus being almost the joke it has been for the past twelve years and active management versus passive will likely see their roles reversed. Buckle up and focus.