Control Panel: Don't worry, be happy?…

**Stock Market Jitters Don’t Endanger Economy Yet**
**Lower stock values are a normal response to Fed tightening that could help ease inflation, economists say**
**by David Harrison, The Wall Street Journal, Jan. 30, 2022**

**On Wednesday, Federal Reserve Chairman Jerome Powell said the market drop wouldn’t harm the recovery. He said it is a natural response to the Fed’s planned phaseout of the emergency stimulus programs implemented at the start of the pandemic that helped prop up asset prices....**

**For now, the Fed doesn’t seem concerned about the market. Speaking to reporters Wednesday, Mr. Powell focused on the risk of persistently high inflation, which would require faster rises in interest rates....** [end quote]

The Federal Reserve has two mandates: control inflation and maximize employment. The mandate does NOT include “the market” – shorthand for the price of assets such as stocks, bonds, commodities, real estate, etc. In reality, the Fed actually has chickened out of monetary tightening in the past when the market had a hissy fit. Maybe Jerome Powell has finally grown a spine and will stick to his guns now because inflation could really get out of the cage on his watch.

It’s reassuring to hear that a falling stock market won’t endanger the economy – yet – as long as your stocks aren’t falling.…

**What May Be in Store as the Fed Cuts Back on the Easy Money**

**People all over the country — indeed, much of the planet — are depending on the central bank to stave off runaway inflation and keep the economy growing. Prepare for trouble, our columnist says.**
**By Jeff Sommer, The New York Times, Jan. 28, 2022**

**As government aid programs wind down, some of the fiscal stimulus has already begun to ebb. And on Wednesday the Federal Reserve said it planned to reverse the monetary stimulus under its control... The global fiscal and monetary stimulus total amounts to $25 trillion.... This year, that flow is being reduced to a comparative trickle....**

**For investors, high-quality bonds should help to buffer volatility, and big losses, in stocks. And you could try adjusting your stock holdings. ...value stocks over growth stocks...Doing nothing may be a good option if you can afford to withstand some blows and have a diversified portfolio. If you aren’t ready, it may make sense to sell off some holdings. ...** [end quote]

When interest rates rise, the value of all existing bonds will fall…except I-Series Savings Bonds, whose principal never changes regardless of prevailing interest rates. Bond prices fluctuate in proportion to their duration, with long-duration bonds changing more than short-duration bonds. But their volatility is usually less than stocks.

In a free market (not manipulated by the Fed), stock and bond prices usually move in opposite directions during market cycles. But the Fed’s manipulations over the past 20 years made stock and bond prices often move in tandem.

The Fear & Greed Index is in Fear.
Stock prices and market internals look ugly. Except for Friday, they have been falling since the beginning of 2022.

Treasury prices are falling as their yields rise. Treasury Par Real Yields are negative at all durations due to high inflation.

The trade is risk-off, as stocks and junk bonds are falling more than Treasury prices which are also falling.

The USD is spiking up. Gold, silver and copper are stable. Oil and natgas are rising, possibly because of the threat from Russia that could force Europe to source more of their energy supplies from the U.S.

Real GDP (inflation adjusted) rose 6.9% in 4Q2021. The increase in real GDP primarily reflected increases in private inventory investment, exports, personal consumption expenditures (PCE), and nonresidential fixed investment that were partly offset by decreases in both federal and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

Real personal disposable income increased only 0.3%, much lower than the average from 2018-2019 which was in the range of 4%. That is also due to high inflation. Whatever the change in GDP, households only are impacted by their own personal disposable income.

The increase in inventories is a wise response to the supply chain problems that have caused inventories to go to zero in some cases. However, higher inventories raise costs and also pose a future risk of excess inventory, a primary cause of previous recessions.

The Macroeconomic risk of Covid-19 appears to be waning. While still very high, the number of new Omicron cases is falling overall (still rising in many parts of the U.S.). Predictably, the deaths are lagging the new cases and are still rising toward peaks seen in 2020 and 2021. But people are used to the pandemic and the economy isn’t going to slow down unless a deadlier variant pops up. It’s likely that the winter spike will be far lower by March.

The situation in Ukraine could blow up any day or could slog along indefinitely. The main impact on the market will probably be the price of energy since Russia could refuse to sell to Europe and/or Russia could be sanctioned.

The METAR for next week is rainy but not stormy. It’s likely that the stock market will continue to decline, but probably not with a sudden bubble pop.