Looking at the Rear View = Big Problems

The gains have been massive in stocks, especially big tech, but even the crappy small caps that retail loves are still up big year over year, even if many are down quite a bit from their all time highs.  The same can be said for bitcoin, other cryptos, NFTs, commodities, real estate, etc.  Basically everything but bonds have skyrockted in 2021.  This leads to the temptation of looking in the rear view mirror, to extrapolate into the future.  But the environment is very different from the start of the year.  Instead of looking forward to a bunch of fiscal and monetary stimulus, the market is now looking at fiscal stimulus that is decelerating and will continue to do so for the next 3 years (Republicans winning 2022 midterm elections is basically a fait accompli), as well as a Fed that is on the verge of a hawkish pivot, as political pressure from high inflation eventually seeps into more hawkish rhetoric from Fed governors and eventually to Powell. 

Now that Powell has been renominated, he doesn't have to worry so much about placating Biden, and the financial markets.  He's totally sold out to Wall St., but he's also sold out to Capitol Hill and the White House, and inflation is the big worry now, not unemployment or economic growth.  

That being said, the window for Fed hiking is shrinking by the day.  You have to make the assumption that if the SPX is in steady downtrend, which I expect to start from the 2nd quarter of 2022, Powell won't start a hiking cycle, but will probably just do a token rate hike to try to maintain a tiny shred of credibility on inflation, and then pause as the US stock bubble pops and weakens the economy.  Powell in 2022 will be a lot like Yellen in 2015, but with inflation hot, not cold.  Yellen was expected to start a rate hiking cycle in the 2nd half of 2015 but she delayed due to the SPX waterfall decline in Aug/Sep 2015, and hiked once in Dec. 2015 and paused for a year before hiking again, only after the election and after the SPX was back to making new all time highs in late 2016.  

Unfortunately for stock market investors, I don't expect such a benign resolution for the SPX this time around.  Here are some reasons:

1) Bond yields are much lower this time around, providing less of that risk parity hedge for when stocks go down.  With the Fed very hesistant to go to NIRP, that will limit potential gains in bonds.

2) Less potent Fed due to high inflation.  Inflation is much higher from all that Fed money printing, gov't handouts, and pork stimulus.  Inflation is payback for printing all that money, and resulting distrust in the dollar as a store of value.  I know the USD is going up now, but that's because of overzealous hiking expectations and global fund flows to the US stock market bubble, not because of long term fundamentals.  Eventually, a massive dollar bear market like you saw from 2001 to 2008 is likely.  Higher inflation makes Fed easing counterproductive, as the Fed money printing will just go towards pumping up asset prices, which will result in higher food/energy prices and rents.

3) Bubble valuations and historically high household allocation to stocks vs bonds/cash.  Most investors are neck deep in US stocks, much more than they were in 2015 or even 2018.  So not that much dry powder left and lots of potential weak handed sellers when SPX enters a downtrend.  Don't forget that baby boomers are older now, they have a natural tendency to sell down stocks and buy bonds.   

4) Unlikely to see big fiscal stimulus like 2017 Trump tax cuts or 2020-2021 Covid gov't pork series.  With a Republican Congress from 2022-2024 and gridlock, expect fiscal impulse to be reduced significantly.  Since there is almost no organic growth in the US, corporate earnings will be flat to down and coming off of the highest valuations in US stock market history.  

5) Ebullient Wall Street sentiment towards stocks is similar to 1999, when stocks seemed invincible after a huge bull run.  It has managed to drag in the millenials, probably the dumbest generation of our times, who hated stocks from 2008 to 2016, and now love stocks since middle of 2020, especially egregiously valued meme stocks.  

So with the combination of bubble valuations, ebullient sentiment, fiscal drag from late 2022 to late 2024, and a Fed less able to go full bazooka stimulus (unless it starts buying stocks, another story for another day) due to inflationary pushback, you have a potent mix brewing for an impending bear market that lasts for years, not a couple of months.  2021 was the year to buy the dip.  2022 will be the year to sell the rips.  

SPX looks heavy the past few days, seems like Powell renomination relief rally that lasted a few hours was the top for this move.  Usually the day before and after Thanksgiving are bullish due to holiday cheer, but expect weakness starting from next week dragging out to probably the middle of December, with feared CPI on Dec. 10, and potential faster taper from a renominated and less nervous Powell on Dec. 15.  Also throw in the debt ceiling in the middle of all that to scare the chicken littles and you have a few negative catalysts lined up.  Getting tempted to put on shorts soon.  Feeling bearish.  Would like to see a one/two day rally towards 4700-4720 to lay out the short line.