For the most part, this has been a pretty boring year in the markets for me. Outside of the some random episodic and non-trending cases of volatility, our outlook and game plan has largely stayed the same, so I’ve mostly been trading around core positions.

We’ve been of the opinion that inflation and growth was going to accelerate, but that materially changed in November. We knew that changes would eventually come but the market sniffed that out and has already begun the process of pulling everything forward. All it took was a new variant and Captain Transitory himself to get the party started. These two cross currents have created an interesting cocktail that I’m going to unpack for you, hopefully in an entertaining way, because no matter what my wife says, I'm hilarious.

I use the word process very intentionally. When going through a regime change, things do not happen overnight, and they for sure don't happen in a straight line. Patience is something that unfortunately took me a long time to learn, but the markets always give us many opportunities to shift the portfolios.

As I mentioned, one thing that has kicked off this new wave of volatility is the emergence of the Omicron variant. Variants occur all the time, but this one in particular has spooked the crowd because of the reported number of mutations.

In a nutshell, the whole argument for why the developed world needs to help the less fortunate countries gain access to vaccines is because every time the SARS-CoV-2 virus gets into a new host with no defense, there is the possibility it will mutate depending on that specific individual's genetic makeup. From everything I’ve read so far and the last few weeks of data, currently my opinion is that the Omicron variant is more contagious but with way less intense symptoms. If the trend of that data holds, it would speed up the exposure process and help us achieve herd immunity, making it a net positive. But regardless, the emergence of Omicron has caused new travel restrictions which have spooked the markets into thinking that we could roll all the way back to full-blown lockdowns.

Obviously I don't have a crystal ball to see the future, but that's just not going to happen. COVID-19 is not going away and it's going to have variants just like every virus. I clearly did not go to medical school but I do talk to people who did all the time, and the vaccines are working to protect people, which will keep the need for 2020-style lockdowns at bay.

I’ll get off this hot topic and move on to the next item: who is Captain Transitory? I’m glad you asked. He is the alter ego of my buddy Jerome Powell (the head of the Fed).

All year this guy has thrown up this gongshow description of the obvious inflation we are seeing and labeling it as transitory. I guess his game plan was to keep saying inflation will pass and it's not a problem until it magically became true? But, it is. Well shit. Now that he has sobered up to the reality that the inflation was NOT transitory and that it's been ripping for a year and a half, the Fed is going to speed up their process of tapering. Yes, that same tapering we talked about a few months ago, with the frat boys being drunk on spiked Kool-Aid. These things would make a lot more sense if there turns out to be a secret internal Fed mandate dictating that they must act 6-12 months too late.

So - right now we are looking at the combination of new variant fears and tapering being accelerated. The variant and fear that we are going to roll back to the depths of the world shutdown we saw in 2020 has largely caused anything commodity/energy related to get crushed. That would be bad enough on its own, but when you add in Powell saying he’s finally taking away the spiked Kool-Aid from the Kappa Sigma House faster than previously planned, the boys (markets) are pissed.

The wild part of this: with energy/commodities getting pounded, it’s actually causing our inflation outlook to disappear at a faster rate. We thought this was probable to occur in Q1 2022, but the markets are pulling the expected timeline for disinflation (the slowing down of inflation) up a few months earlier. So Captain Transitory should have just shut up and let the markets mean revert and self correct. The Fed’s ego and the belief that they can bend economic reality is fascinating to watch in real time.

If you know me at all, you know I can talk about this stuff forever, and I'm letting my tires spin a bit extra on this one, but I’ll get to the damn point.

As previously stated, whenever we are going through a regime change there is going to be a lot of volatility and pain in the short term and the markets just need to sort themselves out. This is an opportunity to incrementally shift the portfolios from where we are to where we want to go. In other words: on green, sell what we want out of; on red, buy the new fun stuff we want.

99.99% of the time when I'm buying new stuff, it’s because I’m positioning us for the new part of the cycle that we are going into. We are shifting the portfolios for disinflation and rising growth. Classic goldilocks. Yes, I said inflation is going to slow down, and I give zero shits about what Captain Transitory thinks. Why would I listen to a conflicted guy who is 1.5 years late to the party and only just now making changes?

So yeah, the markets are going to be in flux for a bit. But these are the environments I enjoy the most, because volatility is opportunity. Too many people think investing is easy when everything is going up and to the right, but markets like the one we’re experiencing now prove that this ain't a hobby. Respect the market, or she will get you.

And buckle up, Buttercup - it's gonna get bumpy.

Join Gloria and I on Wednesday, December 15 at 1:30 PM to join our discussion about disinflation, what’s contributing to the current market climate, and what I mean by ‘volatility is opportunity.’

Sean McDougle, CFP®