Investment Commentary –December 12th, 2021

Year to Date Market Indices as of December 12th 2021
• Dow 35,545 (16.14%)
• S&P 4,634 (23.38%)
• NASDAQ 15,237 (18.13%)
• Barclay Bond Aggregate (-2.89%)
• Fed Funds Rate 0-0.25 (0-0.25)
• Annual Inflation Rate 6.8% (As of 11/21/21)

Inflation and omicron are weighing on markets. Here’s what to keep in mind

As the U.S. stock market is whipped by rising inflation and the new omicron covid-19 variant, investors may be wondering what to do with their money.
Many experts have a simple answer: nothing.

On Tuesday, stocks slid for the second day in a row after yet another indicator showed rising inflation. The November producer price index, which measures wholesale prices, rose 9.6% on the year, a record pace and faster than economists anticipated.

The S&P 500 slumped more than 1% and the tech-heavy Nasdaq fell 1.73%. The Dow fell about 100 points after initially opening higher.

In recent weeks, markets have gyrated on fears of the omicron variant as well. Initially, stocks dipped as the new variant took hold and later regained lost ground when data showed that the strain leads to milder illness than other forms.

While volatility can be troubling for investors, experts caution against any hasty selling when markets fall. In addition, slumping stock prices can be a prime buying opportunity that investors should take advantage of.

Volatility is the norm

All investors should accept market volatility — which is relatively common — as a normal part of the process of investing and the best way to outrun inflation, said certified financial planner Brad Lineberger, president of Carlsbad, California-based Seaside Wealth Management.

“Embrace the volatility, because it’s why investors are getting paid to own stocks,” he said.

MARKET INSIDER: The Federal Reserve is expected to take a very big step toward its first rate hike

The Federal Reserve is expected to announce a more rapid transition away from its easy policies after its meeting Wednesday, as it sets the stage for the first interest rate hike next year.
The Fed is also likely to provide a new description of how it views inflation, and acknowledge that it no longer views it as transitory.

One wild card that market pros are watching closely is what the Fed says about its $8.7 trillion balance sheet and whether it tips when it might start to shrink it.

The Federal Reserve is expected to announce a dramatic policy shift Wednesday that will clear the way for a first interest rate hike next year.

Markets are anticipating the Fed will speed up the wind-down of its bond buying program, changing the end date to March from June.

That would free the central bank to start raising interest rates from zero, and Fed officials are expected to release a new forecast showing two to three interest rate hikes in 2022 and another three to four in 2023. Previously, there had been no consensus for a rate hike in 2022, though half of the Fed officials expected at least one.

At the end of its two-day meeting Wednesday afternoon, the central bank should also acknowledge that inflation is no longer the “transitory” or temporary problem officials had thought it was, and that rising prices could be a bigger threat to the economy. The consumer price index rose 6.8% in November, and it could be hot again in December.

“I think getting out of the easing business is very much overdue,” said Rick Rieder, chief investment officer of global fixed income at BlackRock.

The Fed put its quantitative easing program in place to combat the effects of the pandemic in early 2020, and it also slashed its fed funds target rate back to zero.

Preparing the markets

Fed officials in mid-November began discussing the idea of a more rapid taper, and they have successfully swung market expectations to look for a faster end to the one-time $120 billion a month in bond purchases. Market expectations have also moved forward on the timing of interest rate increases from starting late next year to beginning in June.

Rieder said by ending the bond purchases sooner, the Fed is giving itself the option to raise interest rates. “I think they can hike rates in 2022. I don’t think there’s a rush,” Rieder said.
He said the Fed could hike twice in 2022, and three to four times in 2023.

“I think the data will determine when they are going to start. I don’t think the Fed has any notion that they have to start at any given quarter,” he said. Rieder said the Fed will then be able to get a better handle on how persistent inflation is and whether the virus continues to be a risk for the global economy in the new year.

While the Fed is expected to sound hawkish, or in tightening mode, Fed Chairman Jerome Powell could sound much less so when he speaks to the press at 2:30 p.m. ET Wednesday, 30 minutes after the statement and forecasts are released by the central bank.

“For them to justify speeding up the taper, the FOMC statement has to be pretty abrupt,” said Vince Reinhart, chief economist at Dreyfus & Mellon. Powell will likely discuss both hotter inflation, but also why the Fed could remain somewhat cautious.


News Around The web:

Help wanted: Initial claims for unemployment benefits continued to fall to the lowest weekly levels in decades, while job openings remained historically high, providing further evidence of the nation’s tight labor market. The government reported on Wednesday that there were 11 million openings at the end of October, with nearly 5 million more open positions than people seeking work.

Fed ahead: At its two-day meeting scheduled to conclude on Wednesday, the U.S. Federal Reserve is expected to consider accelerating the pace of its plan to trim its pandemic-era bond-purchasing program. The so-called taper proposal to begin reining in the Fed’s $120 billion in monthly bond purchases is a response to the recent persistence of high inflation.

Debt ceiling deal: A week after reaching a short-term agreement to avoid a government shutdown, lawmakers approved a measure that allows the Senate to raise the nation’s debt ceiling through a simple majority vote. That measure was expected to lead to separate votes in the House and Senate to raise the debt ceiling before December 15, avoiding a potential default of the government’s debt obligations. (Market Indices) (This day in Financial History) (Around the Web & Upcoming Events) (YTD Performance Chart)