Generations vary in length, but some believe that 20 to 30 years is an appropriate length to determine a change from one set generation of people to another. In that regard, we have a whole investing generation that has never experienced a period of high inflation, a bear market in bonds, or stagnant equity markets.

As all cycles do, the 20-year cycle can vary in length, but it has been documented to be a force in the markets. So, we look back 20 years to 2002 for insight. 2002 was not a good year for the S&P 500 as it was down 23.4%

Three times that cycle or 60 years, is considered to be a master time cycle by those who follow and apply the methodologies of WD Gann. Much like this year, 60 years back, 1961, was a stellar investing year as the S&P 500 returned 23.1%. Sadly, the following year 1962 was not great, returning a loss of -11.8%. Half the 60-year master cycle would be 30 years and 1991, which was another stellar investing year returning 26.3%. But the following year, 1962, was lackluster in comparison, with a positive return of just 4.5%. The NASDAQ composite was established in 1971 so we don’t have a 60-year record, but for half that period of time, the returns for both 1991 +56.8% and 1992 +15.5% were stellar.

If this 60-year cycle is still operative, the returns for the coming year of 2022 would be lackluster at best for the S&P 500 and possibly negative. But potentially better for the NASDAQ composite.

Given that the current Consumer Price Index inflation rate is at +6.8%, and the headline number for Producer Price Index at +9.6% (Ex-Food & Energy at +7.7%) a bear market in fixed income is almost a certainty unless the inflation rate and the expectations for more inflation by consumers is checked by the Federal Reserve. The fact is this, if the CPI was calculated today as it was originally designed, the stated inflation rate would be far higher, approaching 15% annualized. Thus, interest rates are negative across the curve in relation to inflation by a wide margin.

The prolonged period of monetary support and fiscal stimulus has now let the inflation genie out of the bottle and there will be no quick fix. And at some point, fixed-income investors will demand better returns for their dollars.  

With the Fed’s full employment component of its dual mandate (full employment/ low inflation) having been achieved, the Fed can and should focus on reigning in inflation.  And so, the Fed is in the process of ending its current 120-billion-dollar monthly bond-buying program, with intentions to start raising interest rates in late 2022.
Traders and investors have been gifted the longest bull market in history due to the Fed’s interventions. They will now have to operate in a much freer marketplace. The Fed ‘put’ is going away (at least for now). As stimulus ends, and interest rates rise, the stocks that work the best will be the shares of companies that can pass on costs without killing demand for their products.

If the aforementioned cycles act in concert with the planned Fed tightening, 2022 is looking like a tough year for most US equity markets. Traders and investors will have to learn to operate in that environment.

The best of the season to all. Stay safe.

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