Why will US markets be flat or worse?

On December 15th the Federal Reserve Board of Governors made a press release detailing their plans to reduce their open market operation purchases in 2022. The central bank also predicts several rate hikes in 2021, and continuing on into 2023. When you combine this with the current overvalued state of the market, there's good reason to believe that we will see a minor correction, or a mostly flat market.

1. Fed Tapers Asset Purchases.

Fed Open Market Operation purchases of bank bonds and other assets of buoyed up the stock market. SPY and Fed assets look like virtually the same line. Running a correlation on SPY and Fed purchases from 1/2/2021 yields an astounding correlation between the two of 0.8537, or 85.37%. We hardly EVER see this much influence by the fed

2. Interest Rates

Rates have an inverse relationship with the market. When rates go up, stocks go down. What we want to know is how much rates will increase and how many hikes there will be. The Fed has indicated that there will be three hikes in 2022.

3. Overvalued Stocks?

• The market is historically overvalued right now as per the SPY P/E ratio. We have only seen these levels near the 2008 Financial Bubble and the Dot Com Crash.
• An overvalued market that is dependent on Fed intervention and low interest rates is about to get higher interest rates and less Fed support.
• I’m not saying we are going to experience a crash, but it is more likely that the stock market will be flat for a good portion of 2022, IF the Fed does what they say they are going to do.

Three Alternative Markets to Consider:

1. King Dollar: The dollar has had an excellent run, as most FOREX traders know. But for all the reasons I mentioned above, you can expect it to do better in the long run. Less FED asset purchases and rate hikes will increase the USD's value relative to other currencies and traders should expect further gains in the new year
2. Gold and Gold Miners: Downward pressure on US Equities and the FED backing off of support may scare investors out of the traditional equities. Two options for the prospective traders is your standard XAU pairs and gold miners. If you are unable to trade stocks on US markets, I recommend looking for gold miners on exchanges that are available to you in your own country

3. Emerging Markets and Heavy Industry related currencies in South East Asia and Pacific Economies
AUD, NZD will benefit form the gains in emerging markets in South East Asia. This year alone, Vietnam a 34% increase in their largest stock index. Because these are the largest regional speculative currencies in the area, FOREX traders looking to benefit from the gains in emerging economies would do well to consider AUD and NZD pairs.

For questions and comments, you can reach the author at smstreb97@protonmail.com or through the A1Trading discord at @smstreb97