As the first quarter of 2022 winds down today, the stock (and bond) market has a lot on its mind. On Wall Street, it is often stated that the “stock market climbs a wall of worry.” At certain points throughout history, in the face of challenging uncertainties, the stock market has occasionally confounded investors by rising in spite of them. Hence, the saying above.

Today, the stock market has a similar opportunity. The “worries” that face it now are obvious: War, Inflation, Covid, China, and Interest Rates. We call this WICCIR (pronounced wicker). See more below.

While a couple of these nemesis have been around for a while, the others have only recently showed up.

So, will the market climb a wall of worry again this year? No one knows for sure yet, but our research shows the odds are against it.

Research reveals that no old adage works 100% of the time, of course. One case in point is the period from 1977- 1980. Talk about a wall of worry! Soaring inflation, rapidly rising rates, international violence (remember the ousting of the Shaw of Iran and the 444 days of hostages?), an energy crisis and a cold war with the Soviet Union (USSR). Sound familiar to today? We thought so too.

Let’s look at the numbers. On 04/01/1977 the S&P500 traded at 99 (that’s not a typo!), and 3 years later on 04/01/1980 it was quoted at 102. Some climb! (sarcasm alert) There were actual pockets of strength in other areas though- precious metals and related miners for one.

By tacking on 2 more years (a period in which inflation was finally broken, the hostages were freed and back home, interest rates and Fed income tax rates were coming down and the Reagan Renaissance had begun), the S&P500 closed at 113 on 04/01/1982 netting a whopping 14% gain over the 5 year span. (That translates into an average annual compounded rate of return of less than 2.75%. FYI: Money market funds were paying double digit returns and with no risk of stock market loss.)

For the record, that 5 year gain was almost entirely erased just 4 months later as the stock market finally hit rock bottom in the recession of 1982. But following that, the new policies and strong leadership under Reagan/Bush set into motion what became a massive 18 year super-cycle bull market. Sure there were “worries” that cropped up during that period too, but what set that massive move into motion and sustained it was liquidity.

In reality, the bull market that followed that recession actually rose on an escalator of hope and confidence (not a wall of worry) propelled by strong leadership and wise policies. Does that sound familiar to today? We didn’t think so either.

WICCIR makes the cloud of market uncertainty thicker and will make the economy look sicker. (OK, maybe not my best rhyme of all time but hopefully creative nonetheless!)

Let’s break the WICCIR “worries” down.

War: This one is pretty obvious. The needless human death toll is awful. The impact on the food supply is critical.

Inflation: “You had better go buy it today because it’s gonna cost more tomorrow.” This hurts all of us in the pocketbook immediately. Corporate earnings will be impacted, too- read lower profits ahead.

Covid: Oh, is this still a thing? The liberals now want you to forget about it; the conservatives won’t until after November. But unfortunately, it’s still a worry for some.

China: This letter could just as easily stand for Communism (China, Russia, N.Korea, etc.), but China is the ring leader and the biggest monster of them all. Let’s clarify something: we are talking about the Chinese Communist Party (CCP) and not the billion Chinese citizens that are trapped by their oppressive regime. This regime (CCP) has no fear of God, ruthlessly pursues wealth, and has no regard for human life. Additionally, the CCP has been bribing our professors and scientist and stealing our technology and trade secrets, not to mention manipulating their currency to the detriment of others. Oh, and I forgot to mention created the C nineteen virus and unleashed it into the world killing scads of innocent people. And don’t take your eyes off of Taiwan- the CCP isn’t (think W in WICCIR). More could be said, but enough has been said.

Interest Rates: The most truly domestic terror on this list. The power the Fed has to slow things down by controlling the money supply is incredible. Matched with the other I in WICCIR this one-two punch may cause great near-term pain for investors- especially bond investors.

One quick note. When creating WICCIR, we were close to making the second I mean Iran and the R stand for Rates. At this moment, Iran hasn’t become a worry for most Americans, but it may and even sooner than we think. So consider the right reserved to update the components of the acronym later in the year, if needed.

Given the risks of WICCIR facing the market, in particular those related to a rapid increase in interest rates to curb inflation, our very own Assistant Portfolio Manager Matt Jollie created the chart below of the Nasdaq bear market of 2000-2002 from his research. In it, he has overlaid the rate hikes (orange) that led to the market topping and the subsequent rate cuts (black) the Fed scrambled to do to avoid (or soften) the resulting recession.

Matt found that during this rate-hike induced bear market there were 16 rallies of 10% or more (small red numbers on chart) and their lengths ranged from as few as 3 days to over 70 days (small blue numbers on chart).

Chart courtesy of Investor’s Business Daily via MarketSmith premium subscription.

What can we learn from this? Todays’ market has recently enjoyed a 2 week bounce, but has thus far failed to move to new price highs. That happened back then too. What is different this time is that inflation is much worse, and the Fed has only raised rates once with more hikes expected. Look again at the chart. Notice how after each of those 16 attempts to rally back to old highs the Nasdaq failed each time and quickly moved to a lower low. Investors beware.

One more thing while I have the CCP on my mind. Could it be that the resurgence of covid in China and the supposed ongoing nature of it, resulting in draconian lockdowns with people starving and being punished for even attempting to go out for groceries, is really a veiled plan to keep their citizens afraid, separated and confused enough to suppress any action of protest or rebellion? Reflect on Tiananmen Square.

Our Current Market Outlook has been upgraded to “Market in an Uptrend” with a green light. The “Core Four” (see top of page) shows 3 green and 1 red light which barely pushes the signal back to green as the VIX tie-breaker shows no urgency by the pros to hedge in a large manner.

Just over 2 weeks ago we posted, “Keep an open mind to the likelihood of a fast and violent ‘reversion to the mean’ up-move in the weeks ahead.” It has happened. Now what?

Truth is, personally I’m not settled with a green light signal at this juncture. But apparently, and more importantly, the market is. Even with our vast experience, we at TPM rely on our rules-based disciplines which monitor the math of the market to make the determination for our Current Market Outlook (C.M.O.).

There is a subtle, big picture chart pattern emerging in the main indexes that suggests a high risk of a “lower high” failure forcing a moment of decision soon. Rest assured, when underlying technical conditions do begin to deteriorate, our daily work of monitoring the footprints of money will recognize it early and our C.M.O. will change accordingly.

Please note we have recently discovered that we are having technical issues with our “Outlook Updates” archive dropdown feature to the right of this post. Until further notice, please use the prior date links at the bottom left of each post to access certain earlier posts.

Game plan: The market is trying to prove itself. Yet, big tests may lie ahead in April: A surprise Fed hike? An acceleration of the war in Ukraine? Chinese military maneuvers? Keep allocating capital in measured steps into your resilient watchlist leaders just in case the good news is no news. Expect volatility. Supplicate the Lord God for wisdom.

Have a Triumphant day! ®