Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending December 17, 2021/Year-to-Date)
- Dow Jones Industrial Average®: -1.7% | +15.6%
- S&P 500® Index: -1.9% | +23.0%
- NASDAQ Composite® Index: -2.9% | +17.7%
- Russell 2000® Index: -1.7% | +10.1%
- 10-year U.S. Treasury note yield: 1.41%
- Down 7 basis points from 1.48% on December 10, 2021
- Up 49 basis points from 0.92% on December 31, 2020
- Best-performing S&P 500 sector this week: Health Care, +2.5%
- Weakest-performing S&P 500 sector this week: Energy, -5.1%
*Past performance is not a guarantee of future results.
Fed tightening and Omicron fears move equities
Though its tone was a bit more hawkish than many market participants expected, the Fed’s mid-week announcement of less accommodative monetary policy was initially cheered by investors, appearing to quell anydoubt that the Fed remains committed to price stability. However, markets exhibited some uncertainty about the effect of tighter policy on economic growth and equity valuations, and concerns about the Omicron variant pressured stocks all week. Major indices declined, with the tech-heavy NASDAQ Composite suffering the steepest drop. The 10-year Treasury yield is about 25 basis points (0.25%) lower than before Omicron was first reported in late November.
- Following the two-day Federal Open Market Committee (FOMC) meeting, the Fed announced that asset purchases will be reduced by $30 billion per month starting in January, double the previous monthly pace of reductions. The move would end purchases of Treasury and agency mortgage-backed bonds by March, three months earlier than initially communicated.
- A majority of FOMC members now expect three quarter-point interest rate hikes in 2022, raising the fed funds rate to a range of 0.75-1.0% by the end of next year. Additional expected rate hikes would usher the rate into a 1.5-1.75% range by the end of 2023. Of course, no rate decisions have been announced yet, and changing economic conditions could lead the Fed to re-evaluate at any time.
- The FOMC’s post-meeting statement dropped the word “transitory” to describe inflation and noted that inflation has “exceeded 2 percent for some time,” also acknowledging “further improvement in the labor market.” As in previous statements, the FOMC said, “The path of the economy continues to depend on the course of the virus,” adding, “Risks to the economic outlook remain, including from new variants of the virus.”
- In his post-meeting press conference, Fed Chair Jay Powell acknowledged the risk of “more persistent” inflation and said, “part of the reason behind our move today is to put ourselves in a position to be able to deal with that risk.”
- Powell and Fed officials issued a positive outlook for the economy, with the chairman noting current conditions of “really strong growth, really strong demand, high incomes.” The Fed’s latest economic projections see 2021 GDP growth of 5.5% and 2022 growth of 3.6-4.5%. They also see higher inflation and lower unemployment in 2022, compared with their September forecasts.
- The European Central Bank left accommodative monetary policies in place, maintaining benchmark interest rates while adjusting bond purchases. The Bank of England took a more aggressive line, raising its benchmark rate from 0.1% to 0.25%. Both the Eurozone and UK are contending with historically high inflation and rising Omicron cases.
Producers and consumers look strong heading into 2022, though inflation persists
The latest batch of economic data confirmed prices continue to climb and the labor market remains strong. Consumers and manufacturers also appear to be in good shape, though risks remain.
- The Labor Department’s Producer Price Index (PPI) rose 9.6% in the 12 months ending in November, the highest since PPI was first reported in 2010. Producer prices climbed 0.8% during the month, higher than both consensus and October’s 0.6% rise. Energy and transportation costs were principal contributors.
- Weekly initial unemployment claims rose slightly to 206,000, but remained near recent lows. Continuing claims continued to fall, reaching their lowest level since March 2020, signaling a return to a more normalized labor market.
- The Commerce Department reported a monthly rise in retail sales of 0.3% in November, just 0.1% excluding spending on gasoline. From November 2020, overall retail sales rose 18.2% and 15.8% excluding gasoline. November’s monthly gain was sharply lower than October’s 1.8%, however analysts believe holiday shopping was pulled forward this year as consumers attempted to counter sluggish supply chains that might result in shortages of or delays in receiving items purchased as gifts. All in all, consumers look well positioned to continue spending, but inflation – particularly around food and energy prices – remains a concern.
- IHS Markit’s purchasing managers indexes for December showed continued expansion in U.S. and European manufacturing. The reports also showed signs that supply chain bottlenecks are beginning to ease. A separate Federal Reserve report showed U.S. industrial production in November at its highest level since September 2019.
- On Capitol Hill, Democrats continued to face difficulty getting their $2 trillion social and climate spending bill to the finish line. The immediate question for the economy is whether monthly child tax credit payments, currently set to expire this month, will be extended into 2022. An end to the payments could affect consumers’ ability to spend.
- The debt limit was raised by $2.5 trillion, averting a potential debt default. Policymakers expect the additional debt-issuance authority to see them through the 2022 midterm elections.
Final thoughts for investors
Markets initially supported the Fed’s move to tame inflation, but significant policy changes can bring volatility and it remains to be seen how the economy and various asset classes will respond to diminishing monetary support. In addition, the Omicron variant has started upending plans around the globe and, as the Fed noted, the economy’s path is heavily dependent on the virus. As 2021 closes, speak to a financial professional about staying on track toward your long-term goals amid uncertainty the new year may bring.