This will be a quick post, as I am finishing up a Commonwealth conference. As usual, it has been a wonderful chance to see old friends, make new ones, and have a great time in a beautiful place. It was as I expected, given the great people—and even better meeting planners—who make Commonwealth so special. In this case, at least, my expectations were well-founded and have been fully met. But today I want to talk about expectations in a more general way.

One of the major current risks to the market is the Fed’s tightening of policy. Much has been written about the Fed’s plans to raise rates, to start downsizing its balance sheet, and so forth. But what has been missing so far is the fact that many of the changes have already been factored in by the market—and what the market seems to be expecting is not really in line with the headlines.

Three hot topics at once. Talk about efficiency! Beyond efficiency, though, I do think there is a fairly deep connection here—and one that is worth talking about right now.

Yesterday, the market sell-off continued, reportedly driven by a higher-than-expected inflation report and a comment by St. Louis Fed President James Bullard that he wanted to hike rates even faster than the market had been expecting. For a market that was already nervous about inflation and rates, it was a one-two punch. The Fed is being forced to act, by inflation, and at least one Fed member is very willing to hike rates quickly in response.

January was a terrible month. Worries about economic damage from the Omicron wave were combined with the Fed’s perceived decision to start raising interest rates based on inflation levels at a 40-year high. Stocks were knocked down around the world. Tech stocks got hit especially hard, but even fixed income was down. It really was a terrible month.

Wow. I have rarely been so wrong about an economic report—or so glad to be wrong. And it wasn’t just me. The range of expected values for today’s jobs report was roughly between -400,000 and +250,000. Everyone was very wrong as it came in at +467,000. This was a much, much larger-than-expected gain, and it clearly shows there is something going on that analysts are missing.

The official jobs report comes out this Friday. Expectations are for another slowdown, with about 175,000 jobs added, down from 199,000 in December. With everything that is going on, especially the number of people who have the Omicron variant and are presumably not at work, that would be a great result. Unfortunately, the real number is likely to be well below that and will probably be negative—maybe significantly so.

Tensions between Russia and Ukraine are showing no signs of abating. The geopolitical implications of further escalation could be quite dire and complicated. Although the deadlock may be resolved through diplomacy, we are watching for the impact on asset prices if the conflict escalates. Energy and commodity markets could be in the immediate line of fire, but repercussions may also be felt in the region’s equity and fixed income markets. Finally, if the situation worsens, the ripple effects could be more broad-based and have an impact on global inflation expectations and monetary policy.

On February 1, China bids farewell to the Year of the Ox and rings in the Year of the Tiger. The ox symbolizes prosperity, diligence, and perseverance. In 2021, this symbol was apt, as Chinese economic policy shifted from “growth at all costs” to “common prosperity” and the country diligently persevered through many regulatory changes. Chinese equities were collateral damage in the process. As the Year of the Tiger rolls in, Chinese equities could remain volatile but purr stronger.

One of the key sources of uncertainty that has driven the market pullback over the past weeks has been interest rates. Specifically, the rise in rates—and the fear that the Fed would tighten further—pulled growth stocks down, including many in the tech sector, and generated significant uncertainty around where the economy was going.