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The recent turmoil in U.S. equity markets, including one of the most dramatic sell-offs since the onset of the COVID War, has been sparked by the U.S. Federal Reserve’s plan to raise interest rates as soon as next month.
Clearly, it is not rocket science: The higher interest rates rise and the cheap money stops flowing, the deeper equities—and economies fall.
The Fed’s next rate bump is expected to set off a rapid series of hikes that could number four to seven this year, according to a range of analysts (see related articles in this issue).
Higher rates will also crimp corporate earnings and growth as borrowing money becomes more expensive.
Facing that future, U.S. stock indexes lost as much as 15 percent in value last month, with past market favorites such as Moderna, Netflix, and Peloton seeing their market values slashed by a third or more.
In large numbers, market gamblers, as we have been reporting for months, have abandoned “growth” tech stocks, speculative SPACs.
Instead, investors are sheltering their money in stocks that are likely to rise with inflation, such as shares of consumer goods companies and stocks that pay dividends are outperforming the weakening equities markets.
Seeking a safe-haven, in the week ending 27 January, investors sent more money into gold exchange-traded funds than any other kind of ETFs, FactSet reported.
The CBOE Volatility Index, which measures investor anxiety, has almost doubled this year; many high-flying hedge funds are down at least 10 percent since December.
Then on Friday, 21 January, the S&P closed its worst week since March 2020 and trading in put options—which make money when stock prices fall—exceeded activity in bullish call options and set a record.
By one measure, call option purchases among individual investors fell recently to their lowest since April 2020, when investors dumped stocks as the COVID War intensified and governments imposed draconian lockdown measures that closed down economies.
However, many investors, particularly individuals, still cling to hope (see related article in this issue); as the market closed on 26 January, the S&P was trading at a price-to-earnings ratio of 22.3, nicely above its 10-year average of 19.2, FactSet reported.
TRENDPOST: We have documented the Fed’s stupidity and/or lies regarding inflation and interest rates throughout 2021 in articles such as “Fed Will Hold Policy Steady, Powell Says” (9 Mar 2021), “Fed Holds Firm on Policy Despite 5-Percent Inflation” (12 May 2021) and “The Powell Push: For Better or Worse” (7 Dec 2021).
TRENDPOST: Considering the true strength of inflation, we had forecast the Fed would raise interest rates despite the word on The Street, up until recently, that they would not raise them until 2023-2024.
In fact, taking into account that the Bankster bullshit for a decade was that when inflation hit above its made-up 2 percent level they would raise interest rates—and that they had raised interest rates when inflation was below that level—with inflation spiking far above 2 percent, we had also forecast a rate increase by late 2021.
TREND FORECAST: We have long said that when rates rise, equity market values will fall. The truth of that forecast is reflected in the markets’ recent turmoil as investors scurry away from the riskiest bets and retreat to safety.
When the Fed raises interest rates to or past 1.5 percent to 2 percent, which could happen this year, stock markets will enter a severe downturn and the mortgage market will implode as fewer home buyers are able to qualify for a loan.
However, while commercial office real estate will decline, the housing real estate sector will slow down and prices will fall… and absent a wild card event, they will not fall sharply.