Tuesday, January 4, 2022
U.S. and International Equities
Equities finished December on a strong note as both the S&P 500 Index and the Dow Industrials rose over 4%. These markets took in stride higher COVID-19 cases, inflation concerns, and the Federal Reserve’s (Fed) evolved hawkish sentiment. The growth-laden Nasdaq Composite lagged but managed a gain of 0.7%.
Developed international market (MSCI EAFE) and emerging market (MSCI EM) stocks reversed course from November in December, finishing the month higher. Amid concerns about an increase in COVID-19 rates worldwide, China property giant Evergrande’s solvency, along with the Chinese regulatory crackdown, investors added risk overseas.
Sectors performed well across the board in December. Real estate enjoyed an excellent December as well as a solid year. Investors saw opportunity in the sector given its income producing properties and potential to act as an inflation hedge. Moreover, consumer staples had an excellent December after being one of the worst performing sectors in 2021. Finally, healthcare and materials produced gains of over 7%.
“Although markets stumbled early in December, the Santa-Claus rally was true to form in 2021,” explained LPL Research Senior Vice President and Director of Research Marc Zabicki. “This despite the prevailing omicron variant concerns and some expectation the Fed will have to tighten policy faster than previously expected.”
Both natural gas and oil had outstanding years, gaining over 45% and 55%, respectively on the back of higher demand and improving economic conditions. However, natural gas pulled back over 15% in December. Moreover, the major metals rebounded in December, reversing course from November.
Fixed Income mixed
The benchmark Bloomberg Barclays U.S. Aggregate Index finished lower in December as some market participants sold off bonds in light of the Federal Reserve’s (Fed) hawkish sentiment. High yield bonds (Bloomberg High Yield Index), which sold off during October and November, rallied in December and have been a bright spot in the fixed income space this year. International bonds finished the month mixed as developed international bonds (Citigroup World Government Bond Index) lost ground while emerging market bonds (JP Morgan Emerging Markets Global Bond Index) performed well.
U.S. Economic Data Recap
Inflation: Overall, consumer prices increased for the ninth straight month in November. The headline Consumer Price Index (CPI) increased at its fastest pace since 1982. The growth in CPI came in over 6.5% on a year-to-year basis, which was more than analysts expected. Removing volatile food and energy prices, the Core Consumer Price Index increased by 4.9% on a year-to-year basis, which was in-line with economists’ expectations. The Labor Department stated that the increases for the food and energy components were the fastest 12-month gains in at least 13 years.
The Producer Price Index (PPI) increased more than expected in November as supply constraints exist, leading to the largest annual gain since the series was updated over 10 years ago. For the 12 months through November, PPI increased over 9.5%, which surpassed economists’ expectations. November core producer prices, excluding food, energy, and trade services, increased almost 7% year-over-year.
U.S. consumer: The Conference Board’s Consumer Confidence Index increased in both November as well as December even as COVID-19 concerns, along with higher inflation (especially rising gas and food prices), weighed on consumer sentiment. However, the University of Michigan consumer sentiment survey increased slightly from November’s ten-year low even as many Americans remain concerned about rising prices across many consumer markets.
Retail sales: Retail sales increased for the fourth straight month in November. U.S. consumers continued to spend even as they faced fast-rising prices as well as an increase in Omicron infections. On a year-over-year basis sales rose over 14%.
U.S. home sales: Such as the case in October, November home sales rose month over month but were lower compared to a year ago. The improving job market can be credited for November’s demand amid higher mortgage rates from the start of August to September along with over 10% less supply compared to a year ago. The median existing home sale price in November came in just over $353,000, which was unchanged from October.
Small business sentiment: The National Federation of Independent Business (NFIB) Small Business Optimism Index increased slightly in November compared to October as small business owners remain pessimistic concerning short-term business conditions. Unfilled job openings remain an issue with small businesses, while supply chain disruptions continue to provide challenges. Moreover, price increases among small businesses have reached levels not seen in over 40 years. According to the report, small business capital spending is still weak relative to present economic growth.
Federal Reserve (Fed) news: The Fed’s December Federal Open Market Committee meeting provided some notable shifts to monetary policy, which were largely expected by the markets. The Fed is now expected to end its asset purchases completely by March of 2022. Moreover, the Fed believes three interest rate hikes are warranted in 2022. Three months ago, the Fed was evenly split between rate hikes starting in 2022 and 2023.
U.S. employment: At the end of November, the U.S. unemployment rate has declined substantially from last year’s peak near 15% to 4.6%. That being said, the labor force participation rate is just below its long term average of over 62%. Even though some statistics like the labor force participation rate remain far from ideal, the labor market landscape remains tight. This endorses the view taken by the Fed that the labor market is healthy enough to warrant a more hawkish view.
The economic recovery has continued even as the battle against COVID-19 and its variants continues. Strong earnings were an important driver of 2021’s strong stock market performance. Companies’ ability to successfully absorb higher input costs and pass them onto their consumers will play an important role in future earnings results and also the equity markets amid persistent supply chain challenges.
Inflation is proving stickier than many anticipated. The Fed’s hawkish view affirms this. However, inflation should stabilize once the economy completes its reopening, when supply chains are fully operational, and labor shortages ease. The mitigation of COVID-19 variants worldwide and containment of the new Omicron variant, will continue to be critical factors in determining the economy’s trajectory for 2022. In our view, the health of the consumer should be an important driver for 2022’s economic growth.
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