A significant factor determining how traders / investors perform in 2022 is whether a hawkish Fed policy turns out to be correct.
The narrative is that the Fed will commence aggressive tightening monetary policy in 2022, which entails three-dot plot rate hikes and reducing its asset purchases, known as quantitative tightening QT.
The first few trading days of 2022 confirm a bull market intact with risk-on sentiment dominating the mood. But the release of the Fed minutes was a reminder of their intention to normalize monetary policy.
“The narrative is that the Fed will commence aggressive tightening monetary policy in 2022”
WEALTH TRAINING COMPANY
So the minutes from the Fed’s December meeting indicated officials are ready to reverse monetary accommodation policy, which would entail asset purchase reductions and three-dot plot rate hikes this year,
Betting on a hawkish Fed, which according to its December minutes, claims to be ready to tighten and reverse more than ten years of monetary accommodation favored risk-off assets.
So Wall Street posted declines for the first week of 2022. Moreover, Nasdaq, the technology sector which tends to be rate-sensitive to growth stocks, posted their biggest weekly percentage fall since February 2021. Small-capitalization stocks were hit, with some down 30 to 40 percent.
The Fed viewed the labor market as very tight and signaled the Fed could raise rates sooner than expected.
“Wall Street posted declines for the first week of 2022”
WEALTH TRAINING COMPANY
The key figure, labor participation rates, shows another picture
Despite the unemployment rate falling back to historically low levels in December 2021, the labor force participation rate remains depressed.
The Fourth revolution requires highly skilled workers, and there is a mismatch of workers with the right skills
Moreover, lower worker participation rates, a macro trend, is likely to continue in 2022 as companies substitute workers for machines.
“Perhaps out of favor technology sector stocks could be a good play” – Wealth Training Company
The digitalization of business from contactless payment systems to e-commerce will also reduce the headcount.
So companies will invest less in training their workforce and more digital, cybersecurity, and AI robots.
We believe low participation rates will continue this year and even accelerate with autonomous vehicles.
In the Age of AI (full film) Frontline sums up the situation. In the Age of AI concludes that we could be moving towards surveillance capitalism with most of the population dependent on universal basic income.
A few technology companies would benefit enormously from autonomous vehicles, where their business model could include software, monthly fees.
But high technology company revenues would come at the cost of millions of low-skilled driving jobs disappearing. Moreover, legislation against technology would be handing China an emerging superpower the next century on a silver plate.
Betting on a Fed hawkish policy does not connect with declining worker participation rates which is accelerating in the fourth revolution
So just like the Fed’s transitory inflation narrative was fantasy, so too is the idea that the Fed is planning to normalize monetary policy.
In 2018 the three plot rate hikes never materialized. When the Fed raised rates by 25 basis points, stocks had the worst December on record.
Fast forward, and the system is neck-deep in debt in the wake of pandemic lockdowns. So we believe the Fed will continue with QE to support UBI with a high inflation policy to reduce the debt burden.
Perhaps out of favor technology sector stocks could be a good play.