by William Henderson, Vice President / Head of Investments
A shortened Christmas Holiday week pushed markets higher even in the face of increased omicron variant threats and global travel snafus. The Dow Jones Industrial Average rose +0.2%, the S&P 500 Index gained +1.2%, and the NASDAQ gained a healthy +3.1%. Further, year-to-date returns remain well into near-record territory for 2021. Year-to-date, the Dow Jones Industrial Average has returned +19.7%, the S&P 500 Index +27.6% and the NASDAQ +22.2% giving us solid returns across all market sectors. With the healthy returns in risk assets, as expected, bonds sold off. The 10-year U.S. Treasury bond rose by nine basis points to close the week at 1.50%. The fixed income markets react as quickly as the stock market to good news or bad news and each market reminds us why investors own each asset class. Equities remain a portfolio’s return generator and bonds remain a portfolio’s risk management tool.   

As mentioned above, the week gave us mixed news on the pandemic and its impact on the U.S. economy and financial markets. Cases of the omicron variant spread rapidly in pockets of the country, and the government announced an initiative to distribute COVID-19 tests to the public for free. Lastly, regulators approved two new pills that will be available by prescription for those who are sick with COVID-19.  

In a revision to last quarter’s GDP, the U.S. government reported economic growth last quarter was slightly stronger than it had estimated previously. In its final estimate released last Wednesday, GDP growth in the third quarter was 2.3%, an upward revision from the original release of 2.1%. By comparison, GDP accelerated at annual rates of 6.4% and 6.7% in the first and second quarters of 2021, respectively. A report on Bloomberg showed that Christmas shopping, both in person “bricks and mortar” and online was much stronger than 2020. According to the report by Mastercard SpendingPulse, U.S. holiday sales jumped 8.5% from last year as consumers spent more money on clothes, jewelry, and electronics. Sales boomed across the board during the holiday season defined as November 1 to December 24. Many consumers were savvy shoppers and started earlier than normal, most likely due to widely reported supply chain concerns, which in the end, were largely unfounded rumors as most retailers were plentifully stocked with goods.    As we move into 2022, it is important to keep the markets in perspective. Certainly, central banks globally are taking a more hawkish tone and higher short-term rates are a given next year, but that information is already priced into equities. Two questions are typically bantered about: 1) Is the market going higher or lower today? 2) Is today a good day to buy (invest)?  And my answer to both questions is always the same – YES. Yes, the markets will go up or down today and YES, today is a good day to buy (invest). Long-term positive returns on investment portfolios are driven by long-term investment plans and a commitment to sticking to your investment plan. We’ve seen this all year as the market rallies back as quickly as it sold off. Perspective and commitment are what matter the most. 

by William Henderson, Vice President / Head of Investments
The markets digested a pile of negative news last week and reacted as expected, selling off by the week’s end with all three major indexes closing lower. The Dow Jones Industrial Average fell by -1.7%, the S&P 500 Index lost -1.9%, and the tech-heavy NASDAQ fell by -3.0%. Just last week we discussed hitting records by year end and then, as has been markets’ modus operandi lately, things whipsawed the other way when some new or semi-shocking news hit the tape. Thankfully, year-to-date returns remain healthy. Year-to-date, the Dow Jones Industrial Average has returned +17.7%, the S&P 500 Index +24.7% and the NASDAQ +18.5%. 

Last week the FOMC (Federal Open Market Committee) wrapped up its two-day meeting and did what the markets and economists had expected. It announced it will wind down bond purchases at a faster pace due to increased inflationary pressures on the consumer and healthy employment levels. However, there was a new “tone” in the Fed’s message that the markets read as hawkish – meaning higher rates are coming. The new outlook for rates in 2022 is showing as many as three rate hikes in the second half of the year. While not unexpected, the markets and the economy have become a little too accustomed to easy monetary policy. The chart below from Bloomberg shows how U.S. inflation, as measured by the Consumer Price Index, is higher than it has been in about 30 years, with dots indicating the timing of the Fed beginning to hike rates. The Fed’s hawkish pivot is typical behavior and standard reaction to a jump in inflationary pressures.   

The omicron variant of COVID-19 is having a much bigger impact on the markets and the economy than the expectation of higher rates. We knew higher rates were coming and we believed omicron was in check but, globally and in the United States, we are seeing renewed shutdowns and closures as the omicron variant spreads more rapidly than expected. Several Broadway shows and NFL football games were canceled over the weekend just as a sense of normality was returning. Closures and cancellations are not what the economic doctor ever orders for a recovery economy. Mall activity and shopping are at decent levels and consumers are spending for the Christmas holiday. Retail sales information will be telling when released next month. It is important to note that current vaccines when taken with the booster, deliver a powerful punch to the omicron variant and most hospitalizations and severe illnesses are among the population that has yet to get vaccinated. 

In our weekly Heat Map, we moved Fiscal Policy to neutral from positive because the Build Back Better bill looks to be dead for 2021 and questionable for 2022. If the Biden Administration cannot piece together a coalition to support his plan while in numerical control of the U.S. House and Senate, their future looks bleak, especially given 2022 is a mid-term election year. For that reason, we believe fiscal stimulus (support for the economy from the government rather than the Fed) will wane in 2022 and is no longer supportive of the economy. 
  

We do not want to be repetitive more than required but the negatives we point out above: omicron, Fed tapering, higher rates and removal of fiscal stimulus are not new worries. We have talked about and them for weeks and are well prepared. Stock markets can rally well into a Fed tightening cycle. The chart below from Bloomberg and Edward Jones, shows equity market returns, as represented by the S&P 500, during the two years following the first time the Fed began hiking rates in previous rate-hiking cycles over the last 35 years. 

Everyone knows past performance is not indicative of future performance, but we can learn from history and history shows us that stock markets can do well even as liquidity tightens and monetary and fiscal stimulus wanes. Last week, as equity markets fell, the bond market provided needed risk management for portfolios. The yield on the 10-Year U.S. Treasury dropped seven basis points from the previous week to 1.41% as investors moved from risk assets, such as equities, to the relative safety of bonds. With only a few trading days left in the year and news, but not “new” news hitting the tape every day, investors will be challenged and whipsawed as their investment plans are tested. We remain focused on the long term rather than the short term and believe that the economy remains well on its way to a strong recovery and a healthy 2022.