The S & P 500 has had it largest three day sell off since May.  By casual observation, the headwinds facing the markets are strong.  In a matter of days, three major supports may have been lost.  First there is monetary.  The Fed is about to commence tapering, perhaps ending by mid-March.  Consensus is expecting the first-rate hike by June.

Second, fiscal support was lost as Senator Manchin said he will not vote for “Build Back Better” as it is currently written.

Third is Omicron.

The pivotal question are these headwinds as strong as perhaps feared?

Monetary policy is extremely loose.  Money supply is still growing around 32%, the pace that it has grown since February 2020.  Real yields are at record lows thus there is an immediate loss after inflation across the entire Treasury spectrum.

I reiterate my long-held view that Main Street will outperform Wall Street.  The beginning of the normalization of yields will benefit Main Street at the expense of Wall Street, the inverse of the last 7-10 years.  Monies could gravitate back into the real economy, into companies that produce hard assets.

I continue to believe liquidity issues are one of the largest hurdles faced by the markets.  All—including the regulatory entities—have commented about how little buying or selling can move the markets, an environment that that could be exacerbated given the issues typically faced at year end.

Commenting about the Treasury market, Treasury yields rose yesterday, the inverse of what was to be expected given the perceived issues that the markets might be facing.  Was the steepening in the yield curve the result of planned tapering?  Lack of liquidity?  Probably both.

What will happen today?

Last night the foreign markets were up. London was up 1.01%, Paris up 0.96% and Frankfurt up 1.111%.  China was up 0.88%, Japan up 2.08% and Hang Seng up 1.0%.

The Dow should open nominally higher on hopes that the President can revive his $2 trillion economic agenda and wagers that vaccines can help tame the omicron outbreak. The 10-year is off 8/32 to yield 1.46%.


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