I’m an investor in an early stage global macro fund. Each month, we publish a newsletter with our thoughts on the market and our fund’s performance. I’m now publishing an edited version of that newsletter here, so a broader audience can participate in the conversation.

It’s been a rocky start to the year, and while some believe we’ve hit the bottom already, we feel the potential for a downside move is not yet over. We expect that downside volatility will continue in a way that may be unexpected in the broader market, and leave people exposed. 

In general, we believe the market is overly focused on the inflationary narrative, given the CPI numbers and the Fed’s hawkish tone. However, we continue to believe that there will be a deflationary impulse before Q1 is over (before H1 is over at the latest.)  This outcome will, of course, be worse for the markets than if we were simply in an inflationary regime.  

Meaningful downside moves like what we’ve seen in January are often followed by a dead cat bounce, and while we cannot be totally sure, our current thinking is that this is precisely what we’ve experienced in recent days. We look to the options expiration (OpEx) dates – the next being 2/18 – as moments of importance because the dampening of volatility by dealers rolls off the broader markets.  If we were to see a spike of volatility soon, it will likely be around an OpEx date.

As it pertains to other asset classes, our current views are:

• • Precious metals – Neutral to slightly negative. 
  • Oil – Slightly negative. We believe there will be a near-term pullback.
  • Bonds – Starting to get bullish, consistent with our expectation of deflation on the horizon.

In terms of forces acting on the market right now, the Fed is the obvious driver with their hawkish policy stance. Our belief is that the Fed is not going to stick with their previously-set expectation on raising rates at most or all of their meetings this year. We believe that when deflation hits soon, this will give the Fed air cover to drive easy monetary policy for some time to come.  

In short, we believe this dip we are experiencing will be buyable, just not yet. It’s possible that we’re wrong and the bottom is in, but we believe that once the post-Omicron bounce starts to fade and we look at the reality of the fiscal situation, there is potentially more volatility to come. This is especially true when viewed against the almost-100% gains the market has made since the COVID lows of March 2020.

The days of buying the S&P or NASDAQ, sitting on it and watching it go up are gone. We believe the era of active stock picking and management is upon us, or just around the bend.  

Our EOY price target is currently 4850.

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