"Fed" Up - The Way of Inflation!

First Avatar movie got released in 2009 in midst of market turmoil due to housing crisis. 13 years later,  "Avatar - The way of Water" got released this week - again in the midst of post-pandemic, inflation driven market turmoil. James Cameron took 13 years to make second Avatar movie and I am sure it would be another blockbuster like first one (needs to make $2B box-office collection just to break even). But "Fed" up sequel seems to have repeated in just 4 years. Last time I wrote with exact same topic was in Oct 2018. Most of the content in that blog could be repeated here. Markets are frustrated that Fed is again behind the curve by continuing to raise rates till it reaches 5.1% even though everyone fears that economy is heading into recession. As reaction to Fed meeting and Powell's Q&A session, markets crashed to send a message - enough! But Powell's fed wants to make sure that inflation is really coming down and willing to take the risk of "transitory" or "technical" recession. The employment is still very strong. Post 2009, economy had jobless recovery. Post pandemic, economy may have "job-full" recession since there is 1.6 job for every worker who wants to work. Post pandemic, job participation has gone down. While many high-tech companies have done layoffs, it's small part of overall employment. No wonder all these layoffs made no dent into unemployment report. So Fed is right to keep the course and raise interest rates to 5% and keep it at that level for 6-12 months. That should help take excesses out from speculative markets like Crypto, SPAC etc. The valuation of once high-flying SAAS companies have already come down to earth and now boast one the most attractive valuations. Let's look at the headwinds and the tailwinds facing economy and markets and how one should position for 2023.

Headwinds:

• High interest rates raising cost of capital (and side effect of money moving to no-risk treasury market instead of risky stocks)
• Economy heading into recession
• Covid still spreading - with covid controls gone, it would become worst in China before Chinese get vaccination and/or herd immunity
• Retail sales have shown some weaknesses
• Lack of labor 
• and most importantly - stubbornly high inflation 

Tailwinds:

• China moving away from strict zero-covid policy and focus on economic growth. It's also relaxing some of the policy targeted to bring down tech giants
• Reasonable valuations for many companies especially in tech areas like software, social, comunications
• Recent downward trend in inflation indicators like PPI and CPI, reduction in gas prices, rental market, slowdown in hosing market
• Everyone is talking about recession and S&P reaching low of 3000. Means there is no "irrational exuberance" giving Fed some leeway to stop after raising rates by another 75 basis points cumulatively in 2-3 meetings (50, 25). Fed would stop after March 2023 meeting (they did same in 2019)

S&P returns were -6.6% in 2018 when Fed was raising rates. Guess S&P returns in 2019? Plus 30%. If history is any guide, 2022 would be like 2018 and 2023 has potential to be like 2019...S&P returning low double digit gains is not out of question. But Q1 would be treacherous till direction of Fed rate hikes is uncertain. In Q1 2019, S&P was up by 13%. That's macro market prediction. When it comes to individual stocks, beaten down mega caps like META, BABA, GOOG, AMZN, APPL and MSFT offer some of the best and safe investments (in that order - before investing do your own diligence). They are like energy giants of 2021 (look at returns of Chevron and Exxon in 2022). 

Tomorrow is FIFA Soccer World Cup final. Both Argentina and France deserve the spot in final. Messi may be playing his last World Cup while Mbappe has few more world cups to shine. So I am rooting for Argentina. But it would be interesting to see if France can match Brazil's record of back-to-back WC wins! Either way, it would be an exciting game. So enjoy the game with friends and family.

Happy Holidays!

/Shyam