U.S. markets were very volatile last week as jobs market data, a more hawkish Federal Reserve (Fed) and the uncertainty from the Omicron variant caused investors to rethink portfolio risk positions. The monthly jobs data was weaker than expected, with 210,000 new jobs created versus a forecast of approximately 500,000. However, the unemployment rate declined more than expected, to 4.2% from 4.6% last month. The tightening labor market and significant increases in average hourly earnings add to inflationary concerns.
The Fed also made a pivot in its positioning by acknowledging that inflation will not drop as quickly as once expected. This pivot is significant for markets as it will most likely lead to an acceleration in tapering and potential rate increases next year.
This week’s inflation data will likely show that the Consumer Price Index increased from 6.2% to an expected 6.7%, which is the highest level in several decades. The month-to-month increase will also represent one of the biggest in many years. Market participants need to navigate this changing reality carefully, as the phrase “don’t fight the Fed” works both to push markets higher as it did for the last 18 months while monetary accommodation was expanding as it most likely will do as it gets pulled back.
I expect the more volatile areas of the market that have high valuations to see more pressure as the Fed pulls back on its accommodative stance. The potential for the pullback is significant in other areas of the market as well, if it begins to feed on itself through deleveraging. Given the current level of valuations and the uncertainty surrounding the next few months, I believe this is not a time to fight the Fed and would be positioned cautiously.
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