Let it Snow, Let it Snow, Let it Snow
A relatively mild start to the winter season came to a rather abrupt end last week with colder temperatures and measurable snow. On its own, snow can provide pretty scenery, however for those taking part in a daily commute the snow can cause headaches. When taken individually, snow and commuting are independent events, however one can have a major bearing on the other. While it could be argued the stock market itself can impact outside events, the stock market is very susceptible to being influenced by outside events.
The stock market began last week on some very high notes, putting together the best two-day streak in over a year. The uplift in the market was attributed to the realization the Omicron variant is more mild than previous COVID variants and therefore not expected to lead to further restrictions which could dampen economic growth. The re-opening stocks, such as travel companies and restaurants, led the rally to rebound from their losses the prior week. The markets finished the week quieter on the heels of a hot inflation report and now sit at the same levels where they were trading prior to Thanksgiving and the latest COVID scare. This provides another example of the importance of maintaining a long-term view and not getting caught up in the short-term noise.
After the excitement in the markets the past couple of weeks, we are starting to experience lower trading volumes which we expect to continue to decrease through the end of the year. Much of the portfolio positioning from large institutional investors and tax harvesting from individual investors is winding down. Preliminary reports of holiday consumer spending have been positive with some reports of supply chain and inventory issues, but many retailers remain optimistic that conditions are improving and shelves are well stocked.
Consumers are fully aware that prices are rising even without data releases from the government. This is especially true during the holiday season when spending for gifts and food is generally at higher levels than at other times during the year. The monthly data release on inflation, Consumer Price Index (CPI), showed that consumer prices have risen by 6.8% compared to a year ago; the highest level since 1982. This report was slightly higher than analysts’ expectations and continues to trend higher. What is alarming is that inflation seems to be gaining momentum with the amount of change from month to month growing larger. Barring an unanticipated event, the rate of increases will need to abate before inflation moderates. We anticipate elevated levels of inflation for the foreseeable future, further cutting into the buying power of consumers as well as the real rates of returns for investors. We will be watching the Producer Price Index (PPI) release this coming week since producer prices tend to be a forerunner of consumer prices.
Job openings remain at the highest levels in history, as was reported last week. The employment reports have shown that unemployment remains low and continues to improve, evidenced last week when the number of continuing unemployment claims hit its lowest level since 1969. Despite this low level of unemployment, there remains some slack in the labor market as we are not yet at what is considered full employment. Labor costs, which have been rising at a rate markedly above the long-term average since the beginning of this year and contributing to inflation, with signals this will continue and could accelerate. Having abundant jobs available, which companies need to fill, coupled with low rates of unemployment are very likely to lead to higher wage pressure.
The focus this week will be on the Federal Reserve (the “Fed”) meeting. Recent comments from Fed Chair Jerome Powell and other members of the committee indicate there will be discussion about speeding up the taper of asset purchases with the expectation being the program will wind down faster than previously anticipated. This will set the stage for multiple interest rate hikes in 2022. At the conclusion of their meeting, the Fed will also release the results of their quarterly internal survey of interest rate expectations going forward, commonly referred to as the Dot Plot. It is projected this will show two rate hikes next year with increasing odds of a third. This is a change from the previous quarter which showed only one rate hike next year. Over the past couple of decades the Fed has strived for transparency, minimizing the impact their actions have on the stock market. However, given the current inflation situation and rapidly changing dynamics in the economy they now have to act faster than in the past, allowing less time to telegraph their intentions. Market reactions, both stock and bond, are most likely to be limited since the markets responded, somewhat sharply, to Chairman Powell’s comments two weeks ago when he provided a preview of discussions at this meeting, unless there is a major deviation from prior comments which would come as a surprise.
The onset of snow does guarantee winter has arrived but unfortunately does not guarantee a year-end Santa Claus rally in the stock market, for which we remain hopeful. For the time being enjoy the scenery the snow provides as it should help get us all in the holiday spirit. We remain available to discuss market events, how they impact your portfolio and strategies to protect against downturns while taking advantage of opportunities. Do not hesitate to give us a call to discuss your individual situation and any year-end strategies.
Wishing you all a happy and joyous holiday season!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
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