The market is facing a conundrum. 

Federal Reserve Chair Jerome Powell has thrown a monkey wrench into the investor playbook. Investors have been worried they will get hurt by the omicron variant further slowing growth and exacerbating supply chain issues, and they have been buying tech and selling cyclicals. 

Now Powell has served notice that because of omicron and continuing supply chain issues, they are getting more hawkish.

Powell may have been using omicron as an excuse to get rid of a policy (“transitory”) that was no longer useful, but regardless.

The Fed getting more hawkish, not less hawkish, was not part of the market narrative.

Now even tech, which is richly priced, is in jeopardy.

Through Covid, the delta variant, and now through omicron, the market has come to believe one thing: Tech wins, no matter what.

But with Powell telling the world he wants to drop the word “transitory” from the language and speed up tapering, and implying interest rates are going up faster than expected, the knee-jerk reaction should be to sell tech.

What to do?

That’s the conundrum: Bulls keep saying the consumer is strong, but premature Fed tightening is the great killer of bull markets, so “buy the dip” is getting tougher to argue.  

“We had been thinking the markets were in a win-win situation,” Matt Maley, equity strategist at Miller Tabak, told me. “If omicron is not a big problem, then we are fine. If it is a big problem, the Fed will come to the rescue with even more dovishness. Now they’re saying they’re going to tighten because of all these variants and supply chain issues? Powell has turned everything on its head.”

Then there is a problem with the rest of the market outside of tech, which has begun a slow-motion decline.

Even before omicron, Europe and Asia were grappling with new rounds of delta outbreaks that have hampered movement and brought stocks lower.

Stocks in Hong Kong, for example, are at 52-week lows. Korea is also at a 52-week low. Japan’s Nikkei has been sideways all year.

European markets have been in a downtrend since the recent delta outbreaks several weeks ago.

European markets (since Nov. 18)

• STOXX Europe 600  down 7%
• Spain                down 7%
• Germany          down 6%
• France              down 6%

Here in the U.S., investors have been selling cyclicals like energy and industrials on the renewed Covid concerns even before omicron, while sparing tech.

Markets (since Nov. 24)

• Tech               down 1%
• Industrials      down 5%
• Energy            down 5%
• Banks            down 7%

Many big names hit their highs for the year months ago and have been in slow-motion declines.   

Dow leaders (% off 52-week high)

• Boeing                    29%
• Disney                    29%
• Dow Inc.                 23%
• Caterpillar               23%
• American Express  19%
• MMM                      18%
• Johnson & Johnson  13%

As for Powell’s about-face on the “transitory” nature of inflation, Tony Dwyer, Canaccord Genuity’s chief market strategist, told CNBC that the whole supply chain issue was still very fluid and that Powell could just as easily change his tone again. “He just did basically a flip-flop in the last month, so who’s to say that can’t happen again next year?” Dwyer said. 

In the meantime, what to do about tech? For a preview, Maley points to 2020. “Rates started moving up in late summer, and by the end of September tech was 15% off its highs,” he said. “And that was in a market significantly cheaper than it is now.”  

It all comes down to where you stand on longer-term interest rates. 

“If rates really are moving higher, it’s tough to buy technology stocks,” Maley said. “If you believe in the phrase ‘don’t fight the Fed’ and you understand we are in an expensive market, it means take some profits.”

Maley has no opinion on how high rates could go, but he notes that “when a price insensitive buyer like the Federal Reserve leaves the bond-buying marketplace earlier than we thought, that should imply lower prices and higher yields.”