2/9/22
By Mark Sauer
We’ve discussed the nature of the market in the past. But I think it’s time to review given the recent volatility.
The market works in two ways. It’s either in an expansion period – growing or what you would refer to as a ‘bull market’ (up-trend) – or a contraction period – when the market is either going down in value, a ‘bear market’ (down-trend) or, what I (personally) would refer to as ‘gathering energy’.
Expansion Period:
Expansion is what we want all the of the time – but we just can’t have that. Nothing can expand forever. What we need to understand is that an expansion period is always preceded by a contraction period. And, the longer an expansion (or contraction period) the greater its inverse period to follow.
We have been in one of history’s longest and most explosive expansion periods. There are many reasons for this – the massive printing of financial capital for one. And we’ve been due for a correction for some time – a cooling off period or ‘contraction’ – in order to continue growing at a sustainable rate. It’s a healthy part of the economic, supply-and-demand process.
Contraction Periods:
Contraction periods happen in two ways – via price/value or via time/duration. 1) A contraction period via a change in price is a steep decline in the value of the market. Large sell offs happen during these times due to fear of economic uncertainty. 2) Time/duration contractions are simply when the value of the market, and its underlying counterparts, trend sideways (a ‘gathering of energy’). Neither losing nor gaining value to any great degree. This is a healthier contraction and often preferred by investors.
What now?
I’m not sure I prefer either. But I can tell you what we’ve seen thus far in 2022 is a price contraction. Which may lead into a further contraction through time as we await decision by the Fed. The NASDAQ , from its high to its low, fell over 18% – that’s a price contraction if I’ve ever seen one. This occurred due to fears of four rate hikes by the Fed – projected by Morgan Stanley – and an expectation of poor earnings relative to valuations. And, in my opinion, the general fear from market participants that we were due for a correction of some sort. Earnings, however, have proven to be more satisfactory than expected. And as I’ve outlined in my recent post – HERE – I do not believe the Fed will raise rates 4 times this year. Most likely, it will be kept to two rate hikes (50 bps).
What Next?
We need more information. I’ve drawn a conclusion – out of my own speculation – that rates will not be raised as rapidly as many feared. Which I believe will bode well for the market once the Fed announces this. Additionally, following decent earnings reporting I would forecast a consolidation through time, for the next few months, with a new expansion period coming in late Q3 or Q4 of ’22.
As always, please reach out to me with any questions you may have.
Best,
Mark S Sauer
info@AllOneWealth.com
+1(310)355-8286
