Inflation continues to be the biggest driver of market performance. Here are our thoughts.
US stocks added to their previous week’s gains to end the best month since 2020, as Fed Chairman Powell’s comments led investors to believe the pace of rate hikes may be easing. The S&P 500 increased by 4.3% and the Dow gained 3.0% for the week. Foreign markets also experienced gains with the FTSE All World Ex US up 1.7% for the week. US crude increased to $98.62 per barrel up from $94.70 the week prior. The yield on the 10-year Treasury fell to 2.64% down from 2.78% the week prior, their lowest level since early April.
The Fed agreed to raise its benchmark federal funds rate by 0.75%, in line with expectations, to a range between 2.25% and 2.5%. Chairman Jerome Powell said it was too soon to say how the rate path would evolve, but he pointed to projections officials submitted last month showing they expected to raise the fed-funds rate to around 3.5% this year and 4% next year. Powell stated, “These rate hikes have been large, and they’ve come quickly and it’s likely that their full effect has not been felt by the economy.” When asked if he thinks the economy is in a recession he said “I do not think the U.S. is currently in a recession. There are just too many areas of the economy that are performing too well.”
The U.S. economy contracted for a second consecutive quarter, a common definition of recession. Gross domestic product fell at an inflation and seasonally adjusted annual rate of 0.9% in the second quarter. That follows a 1.6% contraction in the first quarter of 2022.
Personal income grew by 0.6% in June, slightly above the consensus of up 0.5%. June’s increase matched the revised 0.6% increase in May.
US stocks fell over the week as investors recalibrated their expectations for the Fed to begin tightening monetary policy. The S&P 500 dropped 1.8% and the Dow fell 0.3% for the week. Abroad, the FTSE All World Ex US was down 0.3% for the week. The yield on the 10-year Treasury surged with investors expecting the Fed to move faster to raise the Fed Funds Rate. After the 10-year Treasury ended the year at 1.50%, it jumped over the first week of 2022 to finish at 1.76%. It’s the highest the 10-year has been since January 2020.
US hiring fell well short of expectations in December with 199,000 new hires added. The unemployment rate dropped to 3.9% from 4.2% in November. Wage growth was up 4.7% over the year, a significant increase over recent years.
OPEC+ agreed to continue to gradually increase oil production.
Manufacturing continued to expand in December, but at a slower pace than November.
Analysts are projecting 22% growth in 4th quarter corporate earnings.
Minutes from the Fed’s December meeting outlined that they were planning on completing their bond purchase program in March and that they expected to raise the Fed Funds rate three times in 2022. In addition, they discussed reducing the size of their bond portfolio, another form of monetary tightening. The moves together were more aggressive than investors had anticipated.
US mortgage rates rose to their highest level since May 2020.
Initial jobless claims were 207,000 remaining near multidecade lows.
Eurozone consumer prices rose 5% over 2021, its fastest pace ever.
US Stocks hit new record highs in December as the severity of the Omicron variant appeared to be less than initially feared. After passing the infrastructure package, Democrats were not able to reach an agreement on a $2M social spending package before year end. However, an agreement was reached to raise the debt ceiling that will likely fund the government into 2023. Economic news was mixed over the month. US hiring fell short of expectations with just 210,000 jobs added in November, however, the labor force participation rate rose to 61.8%, the highest level since March 2020. The unemployment rate also fell to 4.2% from 4.6% and weekly initial jobless claims remain near a five decade low. US retail sales rose just 0.3% in November, below expectations, but US retail sales rose 8.5% between November 1st and Christmas eve compared to last year, the best growth in 17 years. Existing home sales rose to their highest rate since January and are on pace to have their best year since 2006. December consumer confidence was higher than expected. US inflation reached a nearly four decade high in November rising 6.8% from a year earlier. Producer prices jumped a higher than expected 9.6% in November over the past year, the highest since tracking began in 2010. With fears over Omicron subsiding, oil surged in December to finish at $75.21 a barrel, a gain of 13.6% for the month and up from roughly $50 a barrel at the start of the year.
Foreign stocks climbed over the month as fears over the new variant’s impact subsided. While cases have surged and many European nations have reintroduced restrictions, stocks climbed as the severity of the cases did not appear to be as bad as other variants. After not making a change last month, the Bank of England elected to raise its benchmark interest rate by 0.15% to 0.25%. It was the first major central bank to raise its benchmark interest rate since the pandemic began. On the flip side, the European Central Bank said it would not adjust its benchmark rate until inflation remained above its target rate for some time. It also said it would phase out its bond buying, program, but boost other stimulus measures. The bank said it was unlikely to raise its benchmark rate in 2022 continuing to provide accommodative policy. China reported higher increases than expected in consumer and producer prices in November as inflation has remained high globally. China’s central bank said it was reducing the cash required to maintain on hand for banks, injecting more liquidity into the economy in hopes of spurring growth. Emerging markets trailed developed markets in December, the fourth quarter, and 2021.
Bonds ticked down in December and yields moved higher as investors grew less concerned with Omicron’s impact. At the conclusion of the Fed’s December policy meeting, they announced a plan to curtail their bond buying program by next March and the potential for three Fed Funds rate increases in 2022. It is a significant change from their projections just a month ago given increasing concerns over high inflation readings. The 10-year yield ended the year at 1.50%, up from 1.43% to start the month and up significantly from 0.93% where it started the year. Muni and credit bonds were the top sectors for the month, quarter, and year. Shorter term bonds topped longer term bonds for the month and year, while longer term bonds outpaced for the fourth quarter.
|Index Performance||December||4Q||Year to Date|
|US Stocks (Russell 3000)||3.94%||9.28%||25.66%|
|Foreign Stocks (FTSE AW ex US)||4.28%||1.81%||8.66%|
|US Bond Mkt. (BBgBarc Int. Gov/Cred)||-0.13%||-0.57%||-1.44%|
|Municipal Bonds (BBgBarc 1-10 Yr Muni)||0.12%||0.10%||0.43%|
|Cash (ICE BofA ML 3-Mo T-Bill)||0.01%||0.01%||0.05%|
US stocks edged higher as fears from Omicron abated. The S&P 500 was up 0.9% and the Dow gained 1.1% for the week. Abroad, the FTSE All World Ex US rose 0.4% for the week. The yield on the 10-year Treasury was flat for the week ending the year at 1.50%, however it rose significantly from the 0.93% where it started the year.
US retail sales rose 8.5% between Nov 1st and Christmas eve compared to last year, the best growth in 17 years.
1Q growth forecasts have been lowered due to the Omicron variant.
Jobless claims came in near a five decade low once again.