The U.S. stock market has managed to stay on track with its outstanding bull run with less than 2 weeks left until the end of the year. It’s true that we’ve seen some short-term spikes of volatility in the markets mainly driven by the uncertainty around the new COIVD variant (Omicron) and the highest inflation CPI readings since the 80’s that we recently got, but we haven’t seen any major price breakdowns on the leading benchmark indices in the US

It seems that the global supply-chain issues are here to stay for longer than most market participants expected, which is undoubtedly a worrying sign for the Federal Reserve as it might produce more supply driven inflation in the coming months The severe supply and demand imbalances that we are seeing in the global economy are a direct product of these supply-chain issues and the weaker labor market in the US

However, what many investors fail to price in accurately is the presence of strong deflationary forces mainly driven by demographics and technology, which are only expected to strengthen their impact on the US economy in the coming years with a record number of people leaving the workforce (retirees) in 2022. Furthermore, we believe that these forces in particular will have a much larger impact and long-lasting effect on the growth trajectory of the US economy than the current supply driven inflation shock that we are seeing at the moment

Why do you think US 10-year and 30-year Treasury yields have performed the way they have so far this year? If bond investors truly believed that inflation will be a major issue for the US economy in the coming years, then they would be exiting their bond holdings at scale, as inflation is a bond’s worst enemy. From a market mechanics perspective, this should bring down bond prices and cause bond yields to spike. We haven’t seen anything even remotely similar to that this year. In contrast, both the US 10-year and the US 30-year yields topped out in late March this year and since then have been trading generally sideways, but with a rather bearish bias. What does that tell you?

We will be publishing our year-end macro economic analysis in the coming weeks where we will be going over these concepts and much more, so stay tuned!

None of the recent market risks was able to substantially bring down the US equity markets. In addition to that, it seems that since Jerome Powell officially “dropped” the word “transitory” from the Fed’s rhetoric in their last meeting, the market has already priced in the potential for a hawkish stance in their ongoing meeting. We believe that the Federal Reserve will continue to be extremely cautious with their tightening actions as they are very well aware of the risks and repercussions that a faster tightening policy could have on the markets

Thus, we are still expecting to see a strong year-end rally for all risk-assets once the uncertainty around the ongoing Fed meeting goes away

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