December Market Commentary

Market Commentary

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.