How Uncertainty Rattles Markets

Omicron is shaking things up... The Federal Reserve changes its tune... How uncertainty rattles markets... Geopolitical hot spots are cause for concern... A major drop for crypto... Bad legislative news for cannabis...

Rarely do economics, financial markets, and geopolitics align – but today they're feeling particularly contradictory...

The Omicron variant, the Federal Reserve changing its tune on inflation and interest rates, and big news in two geopolitical hot spots could turn into bona fide crises at any moment... I (Kim Iskyan) will look at how all of this is playing out in the markets, plus I will see what is behind the recent price plunges in both the crypto and cannabis markets.

So let's get started with the latest on the coronavirus...

The Omicron variant is spreading fast ‒ and spooking investors...

As of today, the Omicron variant has been detected in at least 17 U.S. states and 41 countries – less than two weeks since it was first detected in South Africa.

But there is still a great deal we don't know – whether it's more contagious than previous variants, how sick it makes people who catch it, and the efficacy of current vaccinations against it. Early data about the severity of Omicron is "encouraging," in the words of White House Chief Medical Adviser Dr. Anthony Fauci... But it's still too early to draw any solid conclusions.

The good news is that the big vaccine makers have indicated that they may be able to modify current vaccines to protect against Omicron relatively quickly.

But in the meantime, headlines about Omicron will be front and center for the financial markets, as was the case last week. And recent market history suggests that we're approaching a point of inflection. Here is what Stansberry NewsWire's C. Scott Garliss pointed out on Friday...

When Delta worries weighed on the stock market in September and early October, the S&P 500 Index sold off around 6% and tested the 100-day moving average, which is a support level for the index.

Now, with Omicron, the same thing is happening.

Currently that level sits at 4,490 for the S&P 500 Index...

On Friday, the S&P 500 closed at 4,538, or around 1% above that level. Today, the market traded up... We will see how the week goes. A lower close a few days in a row would be a negative sign from a technical perspective... and suggest that shares may fall in the short term.

And in the meantime, Scott warned...

Until we have more clarity about Omicron, uncertainty will mean sell first, ask questions later.

Meanwhile, last week the Federal Reserve finally acknowledged the obvious...

Federal Reserve chair Jerome Powell came clean on what has been one of the longest-running charades of modern monetary-policy history – he acknowledged that inflation is more than just "transitory."

That has been the Fed's preferred term to describe inflation in the U.S., which has risen from an annual rate of 1.4% in January to 6.2% in October. "Transitory" suggested that as the economy moves past pandemic-induced supply shortages and as demand fueled by COVID-19 stimulus cash dissipates, recent price increases would gradually disappear.

But in testimony before the Senate Banking Committee on Tuesday, Powell said that it's time to "retire" the usage of the term. Inflation ‒ the Fed has finally realized ‒ is not temporary.

Powell said higher inflation will likely last into the middle of 2022. Here in the Digest, we've been warning about higher inflation – and doubting its transitory nature – for months.

However... there's a chance that the Fed's better-late-than-never recognition that higher inflation is sticking around could be a contrarian signal... That is, it's a sign that inflation is close to peaking within the next few months.

As we mentioned on November 8, there are multiple signs that global supply-chain constraints may be easing... which in turn should ease inflationary pressures. But if the Omicron variant sparks renewed supply-chain problems, this whole process could take a few steps back.

On a related front, the Fed may wind down its bond repurchase program sooner...

Chair Powell said that the Fed could accelerate the unwinding of its $120-billion-per-month purchases of U.S. Treasury bonds and mortgage bond securities.

The program – which is a backdoor way of providing liquidity to the U.S. economy – has been a centerpiece of the Fed's COVID-19 economic stimulus effort. Last month, the Fed said it would reduce its purchases each month with the goal of ending them in June 2022.

But in his testimony to the Senate, Powell indicated that the new target to end the repurchases is around March. The clear implication is the Fed could decide to begin raising interest rates sooner than investors had been thinking.

As the Financial Times explained...

A faster exit [from the stimulus program], which many Fed officials expressed public support for this week, is likely to mean earlier-than-expected interest rate increases, a possibility that jolted financial markets and prompted economists to ratchet up their bets for a rate rise next year.

The timing of Powell's comments, in the midst of a renewed wave of Omicron-driven economic and market uncertainty, was unfortunate. But the bright side is that the Fed is open to changing its mind – and that can work both ways.

There's more ‒ the latest employment figures support Powell's position...

Trends in employment are another piece of the economic puzzle... and they're suggesting that the economy is accelerating, which could be further motivation for the Fed to turn more aggressive.

As we wrote on November 1, the U.S. economy is starving for workers. And more people are getting hired, as Scott explained in the NewsWire on Wednesday...

According to the November employment survey from payroll processor Automatic Data Processing (ADP), the private sector added 534,000 jobs. November's jobs report marked the 12th straight month of employment gains for the U.S. economy, according to ADP's data. And it was the 17th consecutive month of job gains out of the last 18. The trend of job gains is still improving.

Then on Friday, nonfarm payroll data for October showed that the economy added 210,000 jobs during the month. That was a lot less than the 573,000 jobs that economists had forecast. But it was still a solid showing, as the unemployment rate fell to 4.2%. Just eight months ago, it was at 6%.

It's another sign of resurgent economic growth... more people on the job means more people who have money to spend and fewer people needing government support.

And it backs the Fed's hawkish attitude – that is, its inclination to increase interest rates sooner rather than later. But depending on how the Omicron variant develops – for example, if global supply chains suffer and lockdowns are imposed again – the Fed's tune could change.

On the other side of the world, two geopolitical hot spots are wildcards, starting with China...

International events are generally less important to U.S. stocks than economic developments and the words and actions of the Fed – until they're suddenly very important.

First... China has long viewed the small, nearby island of Taiwan as a wayward province. Chinese President Xi Jinping has been fairly clear in his statements, like this one from early July...

Solving the Taiwan question and realizing the complete reunification of the motherland are the unswerving historical tasks of the Chinese Communist Party and the common aspiration of all Chinese people.

Taiwan is of strategic interest to the U.S., and to the rest of the world, because it is home to the production of about half of the world's semiconductor industry, which powers everything from computers to cellphones to appliances.

And China may be getting antsy. On Saturday, U.S. Secretary of Defense Lloyd Austin said that incursions by Chinese bombers and fighter jets "look a lot like [China] exploring their true capabilities and sure looks a lot like rehearsals" for a military effort against Taiwan.

What's more, China is not a military minnow. It has the world's largest military in terms of active-duty personnel ‒ at 2.2 million, compared with the U.S.'s 1.4 million. It also has the largest navy, at least in terms of total number of vessels... And while America's nuclear warhead arsenal is 16 times bigger than China's, the Asian nation is looking to nearly triple its number of nuclear warheads by 2030.

History holds dark lessons about the chances of conflict between a dominant power (in this case, the United States) and an up-and-coming power (now, China)... Over the past 500 years, 16 instances of this kind of situation have resulted in 12 wars, as we wrote about in December 2020.

And then there is Russia raising hackles again in Ukraine...

Russia invaded Ukraine in 2014, resulting in the annexation of the Ukrainian territory of Crimea. As the Financial Times explained...

The U.S. warned on Friday that Russia could be planning to invade Ukraine "as soon as early 2022" with an estimated 175,000 troops. Moscow has denied having plans to attack and has called the warnings inflammatory.

In April, Russia massed troops on the border with Ukraine – which used to be part of the Soviet Union and has long-standing, deep historical and cultural ties with Russia. Nothing more happened then, but the U.S. is clearly concerned that something might happen this time around.

Ukraine is unfortunately accustomed to living under the shadow of war. I visited the country's capital, Kiev, a few weeks after the Russian troops took Crimea, eight years ago.

A friend there complimented me on my choice of hotels in downtown Kiev because, he said, it was beyond mortar-strike distance... And one company executive told me that his family had a "go bag" at the ready in case Russian troops got any closer.

This is a bigger issue for Russia than for the U.S. The New York Times summed it up recently...

Russia cares more about the fate of its southwestern neighbor than the West ever will.

But the West will suddenly care a lot more if Russia becomes aggressive again.

And in another sign of uncertainty, crypto markets were bashed over the weekend...

Over a 16-hour period – from late Friday evening to midday Saturday – the crypto markets shed around $500 billion in value... that's close to 20% of the entire market. Bitcoin fell 18% in 24 hours... and while it has recovered a bit from Saturday's lows, it's now down 27% from its all-time highs around a month ago.

I checked in with Stansberry Research's Crypto Capital and Crypto Cashflow editor Eric Wade to get his view on what's happening. He told me this...

At times like this, it's important to remember that cryptocurrencies and blockchain projects are their own type of asset class. They aren't stocks or equities. Crypto exchanges allow for enormous leverage, which means that aggressive traders can borrow up to 100 times their capital – that's multiples more than stock traders can do. And as a result, when cryptocurrency volatility rises, leveraged traders have to sell quickly to avoid being completely wiped out. And that, in turn, pushes prices down... and selling begets more selling.

Part of the problem is that crypto markets are still in their infancy...

Eric explains...

Stock exchanges have circuit breakers and other mechanisms to prevent major sell-offs from getting out of control. They give investors a chance to catch their breath. But there's nothing like that on crypto exchanges. What's more, the cryptocurrency market is 24/7... There are no breaks from the action, and no opportunity for traders and investors to collect their thoughts overnight.

As it happens... in his weekly update to subscribers of Crypto Capital on Friday afternoon, Eric warned readers that the crypto market was on borrowed time and due for a correction, in part because they'd enjoyed a long – by crypto-market standards – streak of relatively low volatility. And then, it happened.

What next? Eric advises that we hold tight...

Cryptos periodically suffer these kinds of episodes. It's best to sit through them.

A sector that has also been under pressure recently is cannabis...

Cannabis producers can't catch a break from Congress... as Scott recently explained in the Stansberry NewsWire...

Late last month, momentum was building for legislators in Washington, D.C., to pass a bill that would be a step toward legalizing marijuana on a national level. The hope was that as the end of the year approached, the Secure and Fair Enforcement ("SAFE") Banking Act, would be part of National Defense Authorization Act ("NDAA").

One of the biggest challenges facing the cannabis sector is that national banks are afraid to do business with it... for fear of regulatory punishment. The SAFE Banking Act would prevent regulators from penalizing banks for providing services to legitimate cannabis businesses – and would be an important development for the sector. Back to Scott...

In April, the House passed the SAFE Banking Act and attached it as an amendment to the NDAA. The NDAA has passed every year at the end of the year since 1961. But Wall Street wondered whether cannabis legislation would pass as part of the NDAA by year end.

Last month, Representative Nancy Mace (R-SC) said she was working on legislation that would legalize marijuana. In addition, the bill would create a cannabis sales tax. She introduced the measure on November 15. Wall Street saw the fact that a Republican member of the House endorsed legalization as a big step toward it finally becoming a reality.

But despite the positive signs, it looks like, after all, the SAFE Banking Act will not be included in the NDAA. Oregon Senator Jeff Merkley, the sponsor of the Act, made comments to Politico last week that he did not believe sufficient votes were in place.

And that has spurred the recent sell-off in the sector.

There's a silver lining for cannabis investors, though...

It looks as if there's growing momentum for a more comprehensive push in Congress to legalize marijuana. Scott says...

Democrats have been in favor of decriminalizing marijuana while their Republican counterparts haven't. Bills have received House approval, only to die in the Senate.

One of the primary issues is many Democrats want cannabis legislation tied to social-justice reform. That includes items like criminal records being expunged and tax dollars being poured back into communities hurt by the war on drugs.

As Cannabis Capitalist editor Thomas Carroll points out, the recent disappointments all improve the odds of legislation being passed in 2022. He said that at this point, disappointed investors are selling now... and asking questions later. And the punishment the sector is suffering from is setting the stage for big opportunity.

In his latest update to subscribers, Carroll highlighted his favorite stocks to buy in the sell-off. To learn more about Cannabis Capitalist and Tom's insights on this sector, click here right now.

New 52-week highs (as of 12/3/21): General Mills (GIS) and Procter & Gamble (PG).

Today's mailbag features a pair of responses to our colleague Dan Ferris' Friday Digest about getting pulled back in like a mob boss... as well as a great point about the "editor's note" on analyst Mike Barrett's Masters Series essay on Saturday. Tell us what's on your mind at feedback@stansberryresearch.com.

"Stop Dan! Stay exactly the way you are. I need your attitude that helps keep me grounded and thinking correctly.

"As a retired 70 year old with a large percentage of my retirement in stocks and bonds, I need your conservatisms. I 'need' to hear what you have to say.

"So keep it up and thanks!" – Paid-up subscriber Steve F.

"Thanks, Dan Ferris, for preparing us for whatever may come. I especially appreciate your research into the anatomy of a crash.

"On the surface, the history of market crashes makes it seem like it all happens overnight. But digging deeper, we see that even though a lot can go sour in one day, the big picture is spread out over a longer time period. It's a great insight to see that historically the risky, high-flying stuff gets hit first, and then as the slide continues, it spreads, eventually hitting the steadier companies in the broader market.

"You didn't mention it, but the need to raise cash to meet margin calls is a factor, as well as the need to unwind call options. Once it gets to the point where panic sets in, everything goes down. Another insight is that the slide can continue for months and even years before a real turnaround.

"For protection, we can set stops. However, we need to be aware that stops are no guarantee. A stop is only an offer to sell; not an actual sale, until a buyer is found. If the suction of the downdraft is really strong, there may be no buyers.

"As the market gets higher and higher, I place my stops tighter and tighter; especially on the riskier companies. I may get 'stopped out' frequently, and miss some of the top, but so what? Better than staying in too long and getting killed." – Paid-up subscriber Al C.

"Mike, well done with your analogy comparing investing and football. As with anything in life, having a well thought-out and executed plan provides generally better outcomes.

"However, I take exception with your assertion that 'you don't need to bring home a victory every time – you only need to win more games than you lose.'

"In my experience, having a 51% success rate in investing provides mediocre results at best. And in football, winning one more game than you lose will leave you sitting on the couch at the end of the season watching the playoffs on TV. I know... as a lifelong Cincinnati Bengals fan, I have endured three decades of negative football returns and yet can't seem to cut my losses and sell!" – Stansberry Alliance member Tim S.

Dean Jones Jr. comment: Tim, first of all, thanks for writing in with the kind words for Mike. We always appreciate the feedback – even if your football allegiance is suspect. (I kid, I kid.)

In all seriousness, though, I just wanted to clarify that Mike didn't actually write the line in question. The top "editor's note" comes from one of our editors who oversees the process of getting the Masters Series delivered to you each weekend.

In this case, I wrote the line you're talking about. And yes, you raise a great point... As someone who has followed sports and investing for decades, I should have been more specific... Losses will happen, but you just want to be sure you win significantly more than you lose.

Thanks again for bringing that up... And good luck to your Bengals when they play our hometown Baltimore Ravens on December 26. It will be a key game for the playoff race.

Good investing,

Kim Iskyan
Ashton, Maryland
December 6, 2021