Friday, Jan 28th 2022

Markets, monetary policy, and manufacturing

Commentary

The below content and projections are the opinion of the authors. Any conclusions or takeaways are their own. This should not be considered as investment advice. Investing involves the risk of loss and returns are not guaranteed.

Three things this week —

1) Microsoft earnings relief. Microsoft’s quarterly earnings report on Tuesday offered investors some consolation amid a turbulent market environment. In our view, some analysts on Wall Street were more than a bit too effusive in outlining the importance of this quarter for the market at-large. But we do agree with the company’s importance insofar as the perspective of Microsoft CEO Satya Nadella tell us the appetite from businesses to invest in growth continues. Businesses generally appear eager to proceed with the en masse digital transformation that forms the backbone of this current business cycle. And few people are in a better position to make this judgement than Nadella.

2) Creators create the creator economy. In Wednesday's edition of Three Things, we highlighted YouTube’s exploration of NFTs on its platform and suggested the challenge for creator economy services like YouTube and others is that they must court both users and artists alike. A lesson Spotify again learned this week, when Neil Young requested that his catalog be taken off the streaming music platform because Spotify is also the exclusive host of podcaster Joe Rogan. Spotify complied. We can all see where the punditry goes next: Is Neil Young starting an anti-Spotify movement? Perhaps. But the episode holds more interest as the latest version of a struggle we expect more platforms to face in the coming years: How do you keep folks happy on both sides of a two-sided marketplace?

3) Uncle Sam needs YOU to fix the chip shortage. The Commerce Department this week released a report on the chip shortage, confirming what investors have known for some time: it’s rough out there. Inventories are down more than 80% for some businesses. Supply hasn’t caught up. And the outlook for how this bottleneck gets resolved is murky at best. Both the House and the Senate seem to agree on a $52 billion package to support chip R&D in the U.S. A bill with this investment included could pass as soon as March, if this week’s reports are to be believed. But the signal here is more important than the noise — politicians are taking note of the chip shortage, and even trying to offer solutions.

Two notes on the Federal Reserve —

The first thing to know about the Fed is that the central bank is tasked by Congress with a dual mandate to promote maximum employment, and low and stable inflation.

We are not breaking news by noting that the second part of this mandate has been under pressure in recent months. With this in mind, the Fed has been signaling to markets that it will raise interest rates this year. If you’re thinking — “Raise interest rates to stop inflation, is it really that simple?” — just know there are economists, policymakers, and investors who will spend their entire careers debating that question.

But the thing to know is that the so-called benchmark interest rate set by the Fed is right now between 0%-0.25%. Over the course of 2022, the range for this rate is expected to rise at least four times.

The second thing to know about the Fed is that there should probably not be this much popular conversation about the Fed, in general.

Monetary policy is, by design, a boring and dense topic. Sectarian debates about the “natural rate of interest” are, like most academic quarrels, ultimately unfit for public consumption. When functioning smoothly, central banking should have the same kind of mindshare among the public as, say, the water company. Both entities work for the public, and ideally both offer a functioning service we hardly think twice about.

Do monetary policy decisions impact the lives of consumers? Absolutely. The interest rate you pay on your car loan, credit card, or mortgage are all impacted by decisions made by central bankers. Of course, the central bankers making these decisions know this. How decisions can, do, or would impact consumers is, we would argue, the primary input in the Fed’s decision-making process. Ultimately, the Fed wants for consumers what consumers want for themselves: a job that pays the bills.

The Fed’s problem right now is that our bills keep getting more expensive. And that’s got everyone talking.

One thought for the weekend —

Every day, Titan Investment Analyst Christopher Seifel circulates a round-up of what the charts for the major U.S. indexes are saying about the condition of the market. (For more on how Titan thinks about technical analysis, read our post from earlier this year.)

Since January 18, the headline in Christopher’s message has been consistent: “Market in Correction.”

Even casual consumers of financial news will likely have seen headlines to the effect of “stock market enters correction” earlier this week. In these stories, a “correction” is defined as a 10% drop in a major index. At one point during the market’s decline on Monday, January 24, the S&P 500 had dropped 10% from its record high reached back in early November.

But for our investment team, a “market in correction” isn’t a measure of how much the index has dropped from its highs, but whether the index’s overall trend is up or down. And the current trend is down.

For investors and traders, there are many informal, in-the-know ways to talk about a market in this state. You can reference a “messy tape,” “wide ticks,” or the market’s “bad breadth.” If there’s one thing the financial industry does not produce in short supply, it is euphemisms for saying that stocks are going up or stocks are going down.

Without spending another 2,500 words detailing all of the conditions that must be met to confirm the market has exited a correction, it will suffice to say that “when stocks go up” is not a complete answer. To put it plainly: just as the market entering this correction was a process, so too will the exit take time.

In hindsight, yes, there will be a single point in time at which stocks stopped going up. But in real time, it takes a series of events for investors to judge that the balance of risks no longer suggests stocks are more likely to go down than up.

For now, we watch and wait.

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