Switch to Decaf
Coffee has been prevalent around the globe for centuries with increased popularity over the past few decades from the surge of large coffee chains and the jolt of caffeine the beverage provides. Specialty drinks based upon coffee have come into vogue and helped propel this ascension. In the current time of year, aficionados are likely to point out that Thanksgiving marks the transition from pumpkin spice latte to peppermint mocha. If the stock market drank coffee, the volatility of the past week might have many of us wish it would switch to decaf and settle down.
Picking up from where it left off from the holiday shortened previous week, the market continued with volatility – to the upside and the downside, and in some cases both on the same day. The latest covid variant, Omicron, continued to be at the forefront but comments from Federal Reserve Chairman Jerome Powell also moved the markets, as did the monthly employment report. The equity markets ended the week lower, near levels last seen in mid-October, and bond yields retreated.
Our assessment is the market, particularly investors, are not afraid of the virus itself but rather how governments might react, with renewed fear of shutdowns or policy mistakes. Widespread restrictions have been announced in Europe but domestic governments have thus far indicated there will not be lockdowns or restrictions, with the exception of some foreign travel. The impact lockdowns could have on the global economy, especially ongoing supply chain issues, coupled with the possibility of additional stimulus would likely further fan the flames of inflation, which remains relatively high and continues to accelerate.
Fed Chairman Powell provided testimony to Congress last week in which he said it was time to retire the term “transitory” when referring to the current state of inflation; finally acknowledging that inflation truly is persistent. He also suggested the Fed would be discussing a possible acceleration to its asset-purchase taper at their upcoming meeting, which would then set the stage for interest rate hikes sooner than previously anticipated. These comments moved stock markets lower, but in our opinion this is the best course of action for the economy and needs to be done to fight inflation before it becomes out of control.
Workin’ For a Livin’
There was no shortage of economic releases last week, with the most notable being employment and payrolls which were lower than expected, leading to some downward pressure on the markets to end the week. While the report did not deliver up to expectations it was not classified as a disaster since it did reflect sustained growth in the labor market. The unemployment rate dropped to 4.2% which is the lowest since before the pandemic. With job openings remaining near historical highs, we would expect continued strength in the employment reports and the number of jobs created in the months ahead. It is worth mentioning we have seen lower than expected numbers numerous times in the past which then
are revised upwards in subsequent months, so it would not be a surprise if that occurred with this month’s numbers.
Our elected politicians in Washington continue their work on current legislative priorities, albeit with limited progress. To use a football analogy, Congress moved near the edge of a government shutdown before “punting” the issue by voting to continue funding until February. Discussions continue in the Senate around the Build Back Better bill which even if it does pass will need to be reconciled with the House version making the likelihood of it being passed by the end of the year now seemingly low. The passage, or inaction, of this bill will most likely have limited short-term impact on the stock market however some provisions, such as changes to the tax code, would impact individuals with increased government spending adding to the inflation fire.
Omicron looks to remain front and center in the coming week(s) as we find out more about the transmission of the virus, severity of its symptoms, and potential impacts on the economy. Early indications are this variant is more contagious than previous variants, however symptoms are mild. To reiterate what we mentioned last week, it appears there has been an overreaction to the news and we think the markets will eventually brush this off and get back on track.
This coming week brings reports of the Consumer Price Index (CPI) from last month, which is a measure of the change in consumer prices and the most commonly used gauge of inflation. Consensus estimates from analysts are for the year-over-year change in inflation to be higher than last month’s reading, indicating inflationary pressures continue to accelerate. Regardless of where this report comes in versus expectations, there is little doubt inflation remains elevated which is expected to continue for the immediate future.
Beyond news making headlines, the markets tend to experience added volatility this time of year from year-end portfolio positioning and tax harvesting. This year seems to be no exception and we would expect some swings in the market to continue over the next couple of weeks however it certainly would not come as a surprise if we see a “Santa Claus rally” to close out the year. For the time being, many investors would like the markets to settle down and get into the holiday spirit. We are not getting too wound up over recent events since we maintain a long-term view of the markets and underlying fundamentals remain strong. Hopefully all of you are able to enjoy your favorite holiday beverages, hot or cold, and remain healthy. As always, do not hesitate to contact us should you want to discuss your portfolio positioning or if you have last-minute tax planning you need to do prior to year-end.
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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