The market was able to shake off Omicron and inflation fears in December and closed a little bit off all time highs. It was a strong showing in 2021 being one of the lowest volatity years on record. Pullbacks were all shallow being no more than 5%. 1995 was the closest resemblance. Earlier in the year I was getting concerned with the speculative fevor going on in certain parts of the market namely in the unprofitable/unicorn tech space aka the ARRK stocks and meme stocks. These were signs of euphoria which is what you see near major market peaks. The bitcoin frenzy was also a sign. In March I made the comparison of the run up leading to the dot com mania peak and what we were seeing at the time. There were clearly some notable similiaries but differences as well. The bears were only focusing on the former of course. But the market did something that was rather remarkable.The undoing of the eurphoria in the speculative sections of the market did not spill over to the broad market. By mid year the high flying tech space tanked with a vengence while the board market simply carried on making new highs. The NASDAQ did lag slighly but not even the biggest bulls out there like Tom Lee expected the NASDAQ to have held up so well. .Throughtout 2021 New covid waves, inflation fears, Fed tapering and tighting have all put a damper on sentiment. The strong US dollar was also a surprise to many but not to me as I pointed out in early 2021 how bearish sentiment towards the dollar was extreme. 2021 was also characterized by vicious rotations from growth the value and vice versa. Lots of active managers/traders got chewed up by this and so even though 2021 was a bengin year when it came to volatility, that was only the case if you did nothing but held the market index the entire way...and as often is the case, that's the best way to go in a bull market. Hedge funds and active manages as a whole once again underpformed the SPX. Think about all the stress, time and effort that goes into managing a hedge fund only to realize that come the end of the year you did worse than a lay investor who simply bought the market and did nothing else.
Comming into 2022 expecations are clearly tempered with the Fed set to taper and raise rates 3 times and fiscal stimulus set to downshift. There's also a lot of complaining/worry about how the breadth of the market is poor. I'm not going to go into great detail but suffice to say that not all measures of breadth are poor such as the equal weighted SPX which returned just about the same as the cap weighted SPX. It surely feels like investors have their guard up. "How long can these good times in the market continue?" is the question that's on everyone's mind including mine. But you see, this is why the market continues to surprise people on the upside - low expecations. It's been this way for the most part since the bull market began in 2009. Along the way there were a few times where expecations becaome too complacent which then led to corrections and these corrections ended up re-reseting expecations quickly back to pessimistic again thus allowing the bull market to resume. I believe the reason why expectations are so easily able to revert back to pessimsism is because there is an ingrained disbelief in the bull market and/or a fear another a major crash like 2008. Many of today's investors have scars from 2008 and 2000. We can now add the Covid crash of 2020 to this list. I also get the sense that even most of those who have generally been bullish have a sort of "one foot out the door" type mentality. I include myself as one of these people. I'm sure more investrors are asking themsleves "how long can this go on for"" as opposed to "I wonder how much money am I going to make this year".
We know from history that the stock market doesn't get into big trouble untill monetary and fiscal condtions get tight while co-inciding with historically optimistic sentiment or at the very least complacency. We are going to enter a period where monentary and fiscal are going to get tighter but would still be classified as easy. Everyone is expecting these tightenings and so there's no suprise factor here unless the tigheninings become greater than what's expected. Lots of people are also concerned about a possible policy error. Therefore, all of this "taking away of the punch bowl" should be priced in and it would appear to me that the market is more inclined to re-rate bullishly rather than bearishly. So long as interest rates across the board are historically low and corporate earnings solider on, the market should remain generally boyant. Dips/corrections will happen no dobut, but they should be just noise unless there's a major negative surprise. Inflation is poised to decelerate this year simply due to base effects alone but also due to declining commodity prices and hopefully this latest Covid wave will be last major one. It appears that it could be the case given the weaker strain of Omnicrom. It's also encouraing that most governments around the world are finally accepting the notion that Covid is something that we may have to live with forever and that draconian lockdowns and quarentines are not the solution. This should lead to less workforce shortages going forward which was a major contributing factor to inflaiton in certain goods and services.
A potential achiles heel for the market at some point could be the crypto space which hardly anyone expects to be a risk for the broader economy. I continue to be a skeptic and the question I'm asking myself is how much of a misalloaction of captial has gone towards this space and how bad will the fallout be now that instituional money has gotten involved? The dot com implosion ultimatley led to a reccession in the economy. Has cyrpto infected the broader economy large enough to take it down should it implode? This is an important question I need an answer to because I believe the jig may be up for crypto.
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