“We continue to believe that the S&P will see a correction of at least 20% over the next one to two years as the Fed is more aggressive than expected to deal with inflation running higher than expected and easy money begins to decrease.” Dan Niles
“The markets are in a volatile and dangerous place as of now,” writes Dan Niles, founder and portfolio manager for the Satori Fund.
In his article entitled “Market Thoughts Following Q1”, Niles contends that investors heed the warning: “Don’t Fight the Fed”.
He states that “Investors are forgetting that it [Don’t Fight the Fed] works on the way down as well as the way up. The Federal Reserve (The Fed) expanded their balance sheet by $4.8 trillion since the start of the pandemic while the US government added ~$5.5 trillion in stimulus. Combined stimulus of roughly half of US GDP of $20.5 trillion is the major driver of why the prices of stocks (along with homes, cars, boats, crypto, art, NFTs, etc) all went up over the past two years during a global pandemic. Now, the Fed dot plot shows 10 rate hikes in less than two years and they will be cutting trillions off the balance sheet probably starting on May 4th along with a 50 bps rate hike.”
“The #1 concern for investors in 2022 should continue to be that the Fed is so far behind the curve on dealing with inflation that they will have to be much more aggressive than in prior tightening cycles despite high inflation & geopolitical risk.” Dan Niles
“We [Satori Fund] continue to believe that the S&P will see a correction of at least 20% over the next one to two years as the Fed is more aggressive than expected to deal with inflation running higher than expected and easy money begins to decrease. Since World War II,
- Every time Inflation (CPI) is over 5% a recession has occurred
- Every time oil prices have doubled relative to the prior 2-year average ($54 in this case) a recession has occurred
- 10 of the 13 prior recessions have been preceded by a tightening cycle by the Fed
- 10 of the last 13 recessions have been preceded by the 10-year yield going below the 2-year yield”
For retail investors, Niles recommends “cash until inflation, Fed tightening and economic slowing run their course over the next one to two years. He writes that “most of the time, cash is a terrible investment especially in a high inflationary environment, but it is better to lose 6-7% to inflation this year than 20%+ in a stock market drop. With the Fed being this far behind the curve on inflation, we will find out how much froth is in valuations as the Fed starts tightening as growth continues to slow.”
Satori Fund likes companies that
- Benefit from economic reopening (not pandemic beneficiaries);
- Are profitable with good cash flow;
- Have growth but at a reasonable price;
- Benefit from higher-than-average inflation;
- Benefit from multi-year secular tailwinds.
They foresee investing tailwinds in:
- Datacenter, office enterprise, and 5G infrastructure.
- Reopening plays such as airlines, cruise lines, travel, rideshare, and dating services as people adjust to covid becoming endemic.
- Banks which should benefit from higher interest rates.
- Alternative energy as geopolitics and fallout from the Russia-Ukraine War drives investment in the space.
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