Stock prices retreated last week as global central banks joined the Federal Reserve in taking steps to tighten monetary policy.
The Standard & Poor’s 500 fell 1.94%, while the Dow Jones Industrial Average dropped 1.68%. 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
This week I want to focus on interest rates a bit. As I circled below, you can see most interest rates have gone up this year. The exceptions are junk bonds (US Corporate CCC) and the very shortest term bonds (1 Month Treasury and Effective Federal Funds).
When the Fed talked last week about ending asset purchases and potentially raising rates* we should note that this has been long anticipated. Rates in general are going to continue going up next year because the economy is very strong. Unemployment is at 4.2%, retail sales are up 16% over last year, and both those forces will likely continue into the new year.
* The Fed only directly controls the Federal Funds rate and the discount rate, which govern banks borrowing from each other and from the Fed, respectively.
Today the Conference Board released their survey of Leading Economic Indicators. It's called leading because after these indicators go up, growth must follow.
"The U.S. leading-economic-indicators index rose by a sharp 1.1% in November, the Conference Board said Monday. Economists polled by the Wall Street Journal had expected a 0.9% gain. Over the last six months, the index is up 4.6%."7
This data is from November, so we have to wait a month to see the effects of Omicron, but this is the type of very positive data that Fed Chair Powell is seeing when they decide it's time to begin to take their foot off the accelerator by reducing asset purchases.
I continue to think that inflation will subside over the course of the next year. What all this means for the stock market is impossible to predict. Fortunately, you don't have to predict the markets to make very good returns. You need to strategy for responding to downturns when they happen.
Our weekly market commentary will be suspended 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!
This Week: Key Economic Data
Monday: Index of Leading Economic Indicators. FOMC (Federal Open Market Committee) Announcement.
Wednesday: GDP (Gross Domestic Product). Consumer Confidence. Existing Home Sales.
Thursday: Durable Goods Orders. Jobless Claims. New Home Sales. Consumer Sentiment.
Source: Econoday, December 17, 2021
This Week: Companies Reporting Earnings
Monday: Micron Technology, Inc. (MU), Nike, Inc. (NKE).
Tuesday: General Mills, Inc. (GIS).
Wednesday: Cintas Corporation (CTAS), Paychex, Inc. (PAYX).
Source: Zacks, December 17, 2021
“Keep your thoughts free from hate, and you need have no fear from those who hate you.”
– George Washington Carver
Is Your Office in a Historic Building? You May Be Eligible for a Tax Credit
In an effort to protect heritage sites and other history, the IRS implemented its rehabilitation tax credit, which offers an incentive to renovate and restore old or historic buildings. Here are some of the highlights to help you determine whether your building is eligible:
Although this credit might not move the needle a significant amount in a lot of situations, it’s still a step in the right direction in trying to preserve our country’s history.
* This information is not intended to be a substitute for specific, individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
Tip adapted from IRS.gov8
Neck and Shoulder Stretches for Desk Potatoes
Many of us sit at a desk for hours a day and stare at a screen. These easy desk stretches can help:
Tip adapted from Healthline9
Tim hands a friend $63 using six bills, none of which are dollar bills. How is he able to do this?
Last week’s riddle: I never ask you questions, yet you answer me all the time. What am I? Answer: A phone.
Dawn meets the Aurora Borealis in Arctic village, Lofoten archipelago, Norway.
Footnotes and Sources
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
8. IRS.gov, January 22, 2021
9. Healthline, June 24, 2021
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Weekly Market Insights: Fed Tightens Money Policy
December 20, 2021