TSP Talk Blog

Stocks were mixed and wobbling for most of the day on Wednesday, but after the Fed released their minutes from their recent meeting, things changed in a hurry. They had a much more hawkish outlook than originally thought, so the inflation and interest rate hike trades took over, which was selling growth stocks rather aggressively. Bonds also sold off as yields moved up on the information.

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After living in a post COVID recovery world for the last 18 months - at least in regards to the stock market, where cheap, easy money was flowing, hearing the Fed get more hawkish is making investors put on the breaks here, especially when it comes to growth and small cap stocks where credit and lower cost loans are essential for business.

The suspicious person in me would like to know why the Fed was so intent in the past on saying that inflation was transitory, when now it does not seem to be the case. Was it a signal to sell for the smart money before the more recent hawkish view was made public? Grumble.

Additionally, they indicated that they will be reducing their balance sheet. This comes at a time when they are actually still increasing it, but have just slowed down the increase. Why not just stop increasing it first, rather than do a quick reversal? This was a shock to the credit market and we saw that in the HYG High Yield Corporate Bond Fund.




The yield on the 10-Year Treasury rallied to new highs on the news as it seems clear interest rates will be going up. The only question now is whether they raise rates 2, 3, or r times this year. A survey showed a 40% chance of seeing four in 2022.




We had been seeing a lot of selling under the radar with small caps down 10% from their all time highs. Meanwhile the S&P 500 Index was making new high just earlier in the week. But technology stocks will be impacted and these four large tech stocks below alone accounted for 33% of the gain in the S&P 500 last year, and if they start going down, does that mean the rally in the C-fund is toast?





At this point we could see some snap back rallies but jumping in could be dangerous. I'm more interested to see if the rallies are getting sold quickly, rather than jumping on the first move up.

The December Jobs report comes out on Friday morning and estimates are looking for about 440,000 new jobs being added, which would be more than double the November number, and an unemployment rate of 4.1%, which would be one tick lower than the prior month's.

Admin Note: The 2022 version of the Guess the Dow Contest is posted in the forum and you'll have until next Sunday to make your guess.

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The S&P 500 / C-fund went from a slight loss to a sell off in a matter of minutes once those Fed meeting minutes were released. There is some possible support here at 4700 as it filled that small open gap, and it is also the area where the blue line was old tough resistance. And resistance, once broken, can act as support. This news may be too much for that motto to hold, but it's possible if investors wake up on Thursday and decide the selling was over done. If that doesn't hold, then the 50-day EMA is near 4656, and then a rising support line is coming up just above 4600.




DWCPF (small caps / S-fund) got slammed and finds itself back down near the prior lows and that 280 day average that held in December. There was also an open gap near 2100 that almost got filled yesterday. So we see some lines in the sand there. This is already down over 12% from the November high. It's rarely a mistake to buy something at a 10% + pullback, but 15% and 20% is not out of the question.




The EFA (I-fund) was leading this year and running close to the upper resistance line of the large trading channel. The negative outside reversal is not a great looking formation. It did manage to fill one gap (blue), and I don't know if that gap near 76.50 (red) is within reach, but it is certainly a possibility if the U.S. market doesn't gain some footing soon.




BND (Bonds / F-fund) got slammed as yields spiked on the hawkish Fed commentary. It made a new low, but there is some support at the bottom of that large trading channel. The big open gap up near about 84.75 could get filled on any relief rally in bonds.

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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley

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