OUTLOOK FOR 2022

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By any measure, 2021 was a strong year for investors. But what’s in store for 2022? From my perspective, I expect that many of the same forces that influenced markets last year will play a role again in the year ahead.

COVID-19 remains tragic and unpredictable. The pandemic was one of the primary drivers of financial market activity in 2021. I hope that the worst is behind us, but I would not be surprised to see COVID-related events influence markets in the New Year.

The Federal Reserve will continue to get its share of headlines. From Fed Chair’s Powell’s nomination hearings to potential changes in interest rates, expect investors’ attention to shift to the Fed from time to time in 2022.

Tax law changes are always possible, but many of the anticipated federal tax law changes in 2021 were linked to President Biden’s Build Back Better plan, which ended the year in debate with Congress. So stay tuned here.

Here’s to a prosperous new year!

Weekly Market Insights – January 3, 2022

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Stocks closed out the year on a mostly positive note, adding to the year’s gains as concerns about the economic issues of Omicron infections receded.

The Dow Jones Industrial Average rose 1.08%, while the Standard & Poor’s 500 picked up 0.85%. The Nasdaq Composite index was flat (-0.05%) for the week. The MSCI EAFE index, which tracks developed overseas stock markets, posted an increase of 0.80%.1,2,3

Notch Record Highs
The end of the year is historically a strong period for stocks–a seasonal pattern dubbed “The Santa Claus Rally.” This year’s final week of trading did not disappoint as stocks posted healthy gains to kick off the week, despite a global increase in Omicron infections. Investors were buoyed by data that showed fewer associated hospitalizations, which helped ease fears of the variant’s economic impact.
The S&P 500 set multiple fresh record highs, with Wednesday’s new high representing the 70th such high in 2021, while the Dow Industrials recorded its first new record since November. Stocks drifted on low trading volume in the final two trading days of the year, capping a good week, a solid month, and a strong year for investors.4

Robust Holiday Sales
The market got off to a good start last week in part due to a strong holiday sales report. A major credit card issuer reported that consumer holiday spending rose 8.5% from last year’s levels, driven by an 11.0% gain in online sales. It was the biggest annual increase in 17 years. The spending by consumers exceeded pre-pandemic sales by 10.7%. The retail categories that experienced the highest sales increases were apparel (+47.3%) and jewelry (+32.0%).5

It was a particularly robust number in view of investor concerns about supply chain disruptions, port congestion, labor shortages, and wavering consumer confidence.

1. The Wall Street Journal, December 31, 2021
2. The Wall Street Journal, December 31, 2021
3. The Wall Street Journal, December 31, 2021
4. CNBC, December 29, 2021
5. CNBC, December 27, 2021

Omicron Variant: What You Need to Know

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Omicron in the United States

CDC is working with state and local public health officials to monitor the spread of Omicron. As of December 20, 2021, Omicron has been detected in most states and territories and is rapidly increasing the proportion of COVID-19 cases it is causing.

Omicron Data and Potential Spread
CDC is expecting a surge of COVID-19 cases in the coming days to weeks. Learn more about Omicron variant surveillance and potential rapid spread.

COVID Data TrackerOmicron Potential Spread

What We Know about Omicron
CDC has been collaborating with global public health and industry partners to learn about Omicron, as we continue to monitor its course. We don’t yet know how easily it spreads, the severity of illness it causes, or how well available vaccines and medications work against it.

Spread
The Omicron variant likely will spread more easily than the original SARS-CoV-2 virus and how easily Omicron spreads compared to Delta remains unknown. CDC expects that anyone with Omicron infection can spread the virus to others, even if they are vaccinated or don’t have symptoms.

Severe Illness
More data are needed to know if Omicron infections, and especially reinfections and breakthrough infections in people who are fully vaccinated, cause more severe illness or death than infection with other variants.

Vaccines

Current vaccines are expected to protect against severe illness, hospitalizations, and deaths due to infection with the Omicron variant. However, breakthrough infections in people who are fully vaccinated are likely to occur. With other variants, like Delta, vaccines have remained effective at preventing severe illness, hospitalizations, and death. The recent emergence of Omicron further emphasizes the importance of vaccination and boosters.

WEEKLY MARKET INSIGHTS 12/20/2021

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Stock prices retreated last week as global central banks joined the Federal Reserve in taking steps to tighten monetary policy.

The Dow Jones Industrial Average fell 1.68%, while the Standard & Poor’s 500 dropped 1.94%. The Nasdaq Composite index tumbled 2.95% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, managed a gain of 0.47%.1,2,3

From Uncertain to Unsettled
Stocks weakened ahead of Wednesday’s Federal Open Market Committee (FOMC) meeting as investors weighed how aggressive the Fed might be in reversing its easy-money policies. Investor sentiment was further dented by disappointing economic data. Retail sales fell short of expectations and a year-over-year jump of 9.6% in producer prices reflected price pressures that may translate into higher future consumer prices. It was the highest percentage increase since records started in 2010.4
The market initially responded well to the FOMC announcement on Wednesday afternoon, but became unsettled into Thursday and Friday over a tighter monetary policy and Omicron concerns.
A New Fed Narrative
After the FOMC meeting, the Fed announced a plan to quicken the tapering of its monthly bond purchases. It plans to double the rate from $15 billion a month (announced in November) to $30 billion a month, effectively putting an end to asset purchases by March 2022. The Fed also signaled that as many as three rate hikes may be coming in 2022.5

The Fed cited elevated inflation and an improved labor market as justification for the pivot from its pandemic-related, easy-money policies. Reflecting the persistence of higher-than-anticipated inflation, the Fed raised its previous inflation estimates for this year and 2022.6

Final Note
Our weekly market commentary will not be published next week. We want to take this opportunity to wish you and your family a wonderful holiday season and a very happy and prosperous new year!

1. The Wall Street Journal, December 17, 2021
2. The Wall Street Journal, December 17, 2021
3. The Wall Street Journal, December 17, 2021
4. The Wall Street Journal, December 14, 2021
5. The Wall Street Journal, December 15, 2021
6. The Wall Street Journal, December 15, 2021

You See it in Prices at the Grocery Store and the Gas Station

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You see it in prices at the grocery store and the gas station. You feel it in your monthly budget. So why don’t the financial markets seem too concerned about inflation?

Remember, financial markets are considered “discounting mechanisms,” meaning they are looking six- to nine-months into the future. And by June 2022, the financial markets expect that inflation will lower than today.1

One lesser-known indicator helps support that forecast is called the Baltic Dry Index. It measures the cost of transporting raw materials, such as coal and steel. The index has been trending lower for several weeks, which in the past has suggested that prices may be more manageable in the months ahead.2

No indicator is fool-proof. That’s why the Baltic Dry Index is just one of the many indicators that our professionals follow when watching inflation. They also keep a close eye on the Fed, which is responsible for controlling inflation.3

With the economy improving, the Federal Reserve has indicated it will be tapering bond purchases this month. That may help with inflation. The Fed also has prepared the markets for higher interest rates in 2022. That, too, may help.4

For now, it’s important to understand that Inflation can influence interest rates, which often play a role in how a portfolio is constructed. We’re keenly focused on what’s next for inflation to determine if any portfolio changes are appropriate in the future.

1. Investopedia.com, 2021
2. CNBC.com, November 10, 2021
3. ClevelandFed.org, 2021
4. CNBC.com, November 3, 2021