Hey There Income Hunters,
Now that the Democrats’ Build Back Better has been derailed for 2021 there is not much economic stimulus to build into the US macro view for 2022.
We will still most likely get a smaller version of the bill in the first half of 2022, but it may be a bit late to save the broad market from a correction in Q1.
There is a bit of less relevant news like Biden extending the pause on student loan repayments through May of 2022 …
However, next year will leave a massive void of stimulus when compared to $11 trillion in monetary and fiscal stimulus was injected into the banking system – and to a lesser extent the economy – in 2020 and 2021.
Today, we’ll look at what this means for the economy and more importantly the markets for next year.
Get Ready for a Fed Tightening Cycle
As we enter a new year of trading, the psychology of investors will shift to a strategy that makes sense during a Fed tightening cycle.
We can’t assume the Fed will quickly flip back to easing unless the stock market drops more than 10%.
That is certainly possible given the lack of stimulus, but the Fed has front-loaded so much of the money printing that there are trillions sitting in the Fed reverse repo facility to support the financial foundation of the markets for a few months.
Check out the graph below and see how easy the financial conditions continue to be.
Now, assuming COVID will reach herd immunity in 2022, a massive deterrent to growth will be lifted.
This will certainly help the economic numbers like sales and leisure/travel, which will get a nice boost.
However, we can never forget the $30 trillion Federal debt load, plus the household debt that is accumulating rapidly
Household Debt Reaching All-time New Highs
We are seeing a pretty negative scenario develop for households.
First, their debt levels are rising to historic levels. Plus, their savings rates are dropping to below pre-COVID levels.
So, the boost in growth may be muted and eventually the reduction in money supply will weigh on the markets.
For this reason I will be playing the market both ways this year …
Sell it when it rips and buy it when it dips (albeit the dips will be deeper than in 2021).
This will be the year of rotations into value stocks, consumer staples, healthcare and energy servicing companies.
The name of the game will be VALUE and aggressive trading within ranges …
Bring It Home
My Power Income Trader program is all about flexibility and taking our cues from Fed and US government policy, which may take six months off from providing any stimulus.
This will only provide a pause from the inflationary environment of 2021.
My thinking is that accelerating inflation will begin again in 2023, and while the market may not be prepared for a disinflationary 2022 … we will be!
There will be even more profits in our future because we will continue to stay ahead of consensus and positioned out in front of the money flow.
This week, in fact, may provide some great opportunities to set up for the Q1 trade, so stay tuned to Power Income.
Live and Trade With Passion My Friends,