Market Update December 20, 2021

Photo by Ray Hennessy on Unsplash

Economic data for the week included the Federal Reserve announcing a faster pace in the tapering off of bond purchases, reflecting stronger growth and inflation pressures, as seen by last week’s high PPI number. Retail sales and industrial production rose, while several regional manufacturing indexes were mixed. Housing metrics also continued to improve.

Global equity markets fell as fears of the omicron variant and Fed tightening intensified toward the end of the week. Bonds fared well with investors avoiding risk, which pushed long-term rates lower. Commodities were mixed, with gains in metals offset by declines in energy.

U.S. stocks began the week mixed, with higher-than-expected producer prices weighing on sentiment. Stocks turned sharply higher mid-week after the Fed announced a ramp-up in its tapering off of treasury/mortgage bond buying, as well as the estimates of several possible rate hikes next year—the decisiveness of which seemed to help sentiment. Digestion of the Fed’s seemingly hawkish turn soured sentiment later in the week, coinciding with a key options expirations date, as the Nasdaq experienced a -7% intraday drop from peak levels. By sector, the defensive groups health care, utilities, and consumer staples gained over a percent. Losses were largest in consumer discretionary, technology, and energy—all of which were down at least -4% on the week. Real estate also rose in keeping with lower long-term rates. (The weekend’s news included a firm rejection from WV Senator Manchin—a key tie-breaking vote—on the current $2 tril. Build Back Better Plan. Reaction to be determined this week, if it means a reworked smaller bill, but also potentially lower spending and lower tax hikes than first anticipated.)

Foreign stocks experienced similar losses on net as U.S. equities, with the U.K. and Japan faring slightly better with stronger economic data. Also, similar to the U.S. Fed, the ECB decided to begin their own tapering off of stimulative bond purchases beginning in January. This is despite conditions showing less strength in Europe than in the U.S., with inflation levels also lower. The Bank of England went a step further, by raising the key interest rate from 0.10% to 0.25%; this was despite a spike in Covid omicron variant cases over the past few week in London alone. The central bank of Norway also raised rates by 0.25% to 0.50%. Rising Covid restrictions generally tended to weigh on sentiment due to the Omicron variant’s rapid spread (which tended to intensify over the weekend, in some places, to 2020-esque levels).

The Turkish lira plummeted (again) by nearly -10% (and equity markets down nearly -15% in U.S. dollar terms, although they gained in local currency) due to concerns over their monetary policy, an S&P ratings downgrade, and contradictions between what their president is pushing and conventional economic thinking. Inflation over 20% in that country have pressured consumers, particularly due to a high reliance on imports (which become increasingly expensive the weaker their own currency gets). By contrast, policy rates were cut another 1% (5% total in the past quarter) to 14%. Normally, raising rates would be a tool used against higher inflation but also in an effort to boost the value of a currency, as it raises the attractiveness of foreign capital inflows.

U.S. bonds gained last week, due to a ‘risk off’ effect, despite the Fed meeting discussion over elevated inflation; treasuries outgained investment-grade corporates, while high yield and floating rate bank loans were little changed. The dollar rose sharply, punishing foreign developed and emerging market bonds.

Commodity indexes fell, along with risk assets and a stronger dollar, as gains in industrial metals and precious metals were offset by declines in energy. The price of crude oil fell by over a percent to just under $71/barrel, while natural gas prices fell by over -5%.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                             

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.