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The Market Struggles to Discount Higher Interest Rates

Some of the market has been in a correction since February, but the indexes and many big-caps have only been correcting for a week.
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Several market strategists at large brokerage firms such as Goldman Sachs (GS) are now predicting the Fed will begin raising interest rates in March and will follow with a series of four or five more quarter rate hikes. In addition, it is now anticipated that the Fed will begin running off its balance sheet.

This is the most hawkish the Fed has been in over a decade, and the market is struggling to deal with it. Both bonds and equities struggled during the first week of the new year, with bonds having one of the sharpest drops in a very long time.

From a trading standpoint, there are two primary questions. The first is, how long will it take the market to discount this shift in Fed policy? The stock market is a discounting mechanism and prices in future expectations. It did not do a good job of anticipating this level of hawkishness from the Fed, but that is mainly a function of the Fed being behind the curve.

This is one of the most significant changes in market character that we have had in the last decade, and the market is confused by how it will develop. It doesn't help that Omicron is raging around the world. Although there is optimism that this will hasten the end of the pandemic, there will still be economic repercussions.

The second issue that the market is dealing with is rotational action. This is not a correlated selloff, with everything sinking at the same time. Financials, energy, and value names are benefiting while growth stocks and speculative names are hit the hardest.

Extra complexity is that so much of the market has already corrected deeply. Sectors like biotechnology and speculative small-caps have been in a downtrend and a bear market since February 2021, but the media and big-caps have only been under pressure for about a week.

Some of the market has already substantially discounted a more hawkish Fed but can it find support while the big-caps and indexes catch up to the downside?

It is an extremely tough trading market, but the negativity is intensifying, and the potential for some counter-trend bounces is building. Also, fourth-quarter earnings are starting soon as big banks kick things off, and that may help to shift some focus back to stock picking.

We have a slightly negative start on the way. Bitcoin continues to see pressure.

At the time of publication, James "Rev Shark" DePorre had no position in the securities mentioned.