Stock markets have had the strongest rally in history since March 2020, when they crashed due to the breakout of the coronavirus. But, they reversed as the central banks and governments around the globe started the biggest recovery programs ever, throwing trillions of dollars/euros into the markets.

This has helped keep the stock market bullish for nearly two years, but as inflation gets out of control, the central banks have started to tighten their monetary policies. This is weighing on the stock markets, with S&P 500 trading close to the 100 daily SMA now, as you can see in the chart above. Stock markets are suffering some heavy losses, with tech companies leading the way down.

Google Daily Chart

Can the 200 daily SMA hold the steep decline in Google?

If you recall from last week, the minutes of the FED meeting revealed that the FED is not only looking to increase the taper (this will be complete near the end of the first quarter), looking to raise rates in 2022 (the Fed projected three rate hikes), but they are also looking to decrease the balance sheet. What does that mean as far as the numbers go?

I spoke about it last week, assuming that the Fed would start by allowing the maturing holdings on the balance sheet to roll-off without replacing the amounts. This weekend, commentary focused on taking a step further, by outright selling holdings (i.e. quantitative tightening or QT).

When the Fed chair spoke about having the tools to slow inflation, selling treasuries on the balance sheet would certainly push up interest rates and potentially slow inflation. The market will get to hear the Fed Chair tomorrow, during his reappointment testimony in front of the Senate Banking Committee.

Certainly, one of the issues in this economic and Covid influenced cycle is the supply chain, which is keeping inflation stubbornly high.

What we saw in the employment report is an offshoot of that problem. Remember that the report showed fewer job gains, but a sharply lower unemployment rate, as people have been exiting the workforce. The baby boomers are reaching retirement age, and retiring one by one, and this is a problem. We may be near full employment, with 10-11 million jobs needed (according to the JOLTS jobs report).

What would be the solution?

Driving up to McDonald’s and having your order taken electronically, the burgers and fries and the rest of the order put together, bagged and delivered electronically as well. Orders for food and drink at restaurants being take taken solely from your cell phone, and perhaps being picked up vs delivered to your table.

Trucking is being done with autonomous drivers. The trend will be towards fewer workers, because the work will be done autonomously. Of course, we are not there yet. There are shortages of chips NOW, but the infrastructure is being built. It will take time though, which could be a problem and it might cause all sorts of volatility in the meantime. How all this plays out in the equity markets is impossible to quantify.