February 2022 Watchlist: Entry Points

Market Overview

We definitely entered the new year with a lot of red. The major indexes (S&P 500 and the NASDAQ) finally sold off and went into correction territory in the month of January. Now why did we fall so much after such a great run? First off we have to understand that corrections are normal and necessary in the market. The reasons behind each one will always be different but as investors we must understand that this is NORMAL. Hopefully you didn't get caught up in panic selling and thinking that the world was falling apart. Same was thought during the pandemic and look at where we are at now.

Crypto & Digital Assets

Now, onto the reason behind this correction. We already knew from the last watchlist that the fed had plans to speed up the taper and talks of the rate hike. I mentioned that the market was aware and priced that in. I also mentioned in the December watchlist about how the market behaves with uncertainty. Well the fed definitely found a way to shake things up. Along with the sped up taper and rate hike, the fed also introduced the notion that they would do QT, better known as quantitative tightening. Also, that potential rate hike? That turned into high speculation of multiple rate hikes, anywhere from 3-5 throughout the year and a potential of these hikes to be from .25% or .50%. A lot of fear and speculation is in the market right now. Every word and action from the Fed is being watched closely. Many investors and institutions are trying to get ahead of this by selling high risk assets like growth stocks and crypto. Many are fleeing to value stocks and dividend payers. A company's financials will definitely be looked at more closely in this environment. No one will be focusing on a growth companies' "potential" whilst it generates no profit. People are fleeing to safety. Companies with strong financials are the ones that are weathering this the best, think Apple and Microsoft. Now you must ask yourself, is it time to buy or sit on the sideline?

Fed & Monetary Policy

Now what does this all mean? The sped up taper, that's simply the fed reducing their monthly bond purchases and trying to stop purchasing by May 2022. As for the rate hikes, this affects how the banks borrow or lend their excess reserves to one another. The federal funds rate also affects loans and credit cards. We have been at an interest rate of 0% since the start of the pandemic. The singular hike of .25% isn't an issue, as I mentioned, it was expected. The speculation in the market is that there will be multiple hikes thus leading to it being more expensive to borrow money to spend. Who gets hurt the worse in this situation? The companies that NEED to borrow money. Those are primarily your growth stocks which is why an index like the NASDAQ was hit the hardest. On to QT. Quantitative Tightening is the fed essentially cleaning up its balance sheet. Remember all those bonds they were buying and how they were injecting "stimulus" into the economy? Well this is the opposite of that. The fed is withdrawing liquidity and allowing the bonds on its balance sheet to roll off i.e. reach maturity and not replace them. We have done this whole process as a country before in the past, the issue is the TIMING. There is speculation that all of these things will happen roughly at the same time. By the time the taper ends it's expected that we will experience our first rate hike. There is belief that there will be multiple as I stated before and there's belief that QT will happen sometime this year. The last time we were in this situation (The Financial Crisis) QT began roughly three years after the taper was completed.

Monthly Performance