A more benign reassessment of the possible economic risk posed by Omicron sent stocks sharply higher last week.
The Standard & Poor’s 500 advanced 3.82%, while the Dow Jones Industrial Average picked up 4.02%. The Nasdaq Composite index gained 3.61% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, rose 2.74%.1,2,3
Large-cap Growth is the current style king, and while big name growth stocks grab all the headline because, let's face it, writers can hold readers attention more easily with stories about companies they have actually heard of, it was not long ago that value was beating growth across all size companies. Here's the same chart from the end of 3Q this year.
Less than 3 months ago, large-cap value beat large growth by 0.76%, mid-cap value beat mid growth by 7.19%, and small-cap value beat small growth by 15.37%! In small and mid-cap sizes, value has kept it's lead, but large growth is back at the top of the heap.
How? Partly because Tesla is up 38.13% in the last 3 months driving a big part of that outperformance. While it's a growing company the PE ratio of 312 has me believing that the stock is clearly in a speculative bubble. When Tesla comes back to earth, so will the large-cap growth style-box numbers.
Though much is still unknown about the Omicron variant, reports of potentially milder health effects and the efficacy of booster shots ignited optimism that its economic impact would be less severe than originally feared.
Stocks rallied higher each of the first three days, with strong gains in many of the reopening stocks, such as airlines, travel and leisure, financials, and energy. The performance of high-valuation growth companies was a bit more erratic as they rose and fell sharply throughout much of the week. Weakening Thursday, stocks turned higher on Friday despite a hot inflation number, pushing the S&P 500 to a new record high.4
If you read the news you might see something like this, written in the Wall Street Journal, about inflation:
"November’s Consumer Price Index (CPI) came in at a nearly 40-year high, rising 0.8% from the previous month and 6.8% from a year ago. It is the 6th-consecutive month that inflation has exceeded 5%. Core inflation (excluding the more volatile food and energy prices) came in lower, but still posted its sharpest jump since 1991.5
Economists have attributed this elevated inflation rate to strong consumer demand, a shortage of goods due to supply chain constraints, and strong wage growth. How long this high level of inflation persists is unknown, but the Fed has begun considering policy steps to manage it."
Sadly, this kind of reporting is quite misleading. The problem is that reporters easily confuse rising prices and rising inflation.
It's true that prices were 0.8% higher in November than the prior month, but that's actually a deceleration from last month's 0.9% increase. But hey, why let the facts get in the way of their preferred narrative. Yes, prices, rose a lot, but inflation actually started to slow down.
The truth is, that after more than a decade of very low inflation, prices are still below the trend line if we had experienced 2.4% inflation (the long-term average) since the great recession of 2008-'09.
Here's a less biased comment from Morningstar.
"The November increase 'was driven mainly by the same categories which have caused excess inflation throughout 2021, namely energy and vehicles,' says Preston Caldwell, Morningstar’s chief economist. 'We continue to believe that the price increases seen in these categories will unwind as supply constraints are relieved, which will contribute significant deflationary pressure. Energy prices already look set to fall given that oil and gas prices have fallen in December. The timing for vehicle price relief is more uncertain, but still likely to occur by the second half of 2022.'"6
Finally, we can always tell a lot about what's happening by examining the Bond market. While fund investors are gravitating toward strategies aimed at protecting against inflation, the prices in the bond market are suggesting that concerns about a long-term rise in inflation have stabilized.
This can be seen in what’s called the 10-year break-even inflation rate. This rate--the difference between the 10-year nominal Treasury yield and the 10-year Treasury Inflation-Protected Securities yield--represents the market’s expectation of what inflation will be 10 years down the line.
Currently, the 10-year break-even inflation rate is at 2.5%--a hair lower than it was last month. That’s higher than the pre-pandemic levels, but the numbers have held steady over the past several months.
This Week: Key Economic Data
Wednesday: Retail Sales. FOMC (Federal Open Market Committee) Announcement.
Thursday: Jobless Claims. Housing Starts. Industrial Production. PMI (Purchasing Managers’ Index) Composite Flash.
Source: Econoday, December 10, 2021
This Week: Companies Reporting Earnings
Thursday: Adobe, Inc. (ADBE), FedEx Corporation (FDX), Lennar Corporation (LEN).
Friday: Darden Restaurants, Inc. (DRI).
Source: Zacks, December 10, 2021
“Never be limited by other people’s limited imaginations.”
– Mae Jemison
Tax Incentives Can Help You Further Your Education
Tax credits help with the cost of higher education by reducing the amount of income tax you may need to pay. The two tax credits available are the American Opportunity Tax Credit and the Lifetime Learning Credit.
Some education savings plans offer tax benefits if the individual qualifies. Also, you may be able to deduct higher-education costs – such as tuition, student loan interest, and qualified education expenses – from your tax return.
If you’ve always dreamed about going back to school, whether to further your career or just to learn something new, knowing your potential tax benefits may save you money.
* 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.gov7
The Benefits of Brain Training
We know how important it is to exercise our bodies, but exercising our brains is just as important. When we continue to learn, our brains are better for it. Here are just a few benefits from “brain training,” or exercising your brain:
There are lots of fun ways to exercise your brain, one of which is to continue to learn new things. Attend a pottery, painting, or foreign language class in your neighborhood, or check for any discounts on community college courses. Another great way to exercise your brain is to socialize with others, spend time in nature, and practice mind puzzles, such as crosswords, Sudoku, or a game in a brain-training app.
Tip adapted from the American Psychological Association8
I never ask you questions, yet you answer me all the time. What am I?
Last week’s riddle: You sit down to play chess. Out of the 16 pieces you have at your disposal, how many of them could be used to make your first move? Answer: 10 (eight pawns and two knights).
Glacier hiker explores ice cave, Svínafellsjökull glacier, Skaftafell National Park, Iceland.
Footnotes and Sources
2. The Wall Street Journal, December 10, 2021
3. The Wall Street Journal, December 10, 2021
4. CNBC, December 10, 2021
5. The Wall Street Journal, December 10, 2021
6. morningstar.com Market Update 12/10/2021 https://bit.ly/3DSg2Tq
6. IRS.gov, June 16, 2021
7. American Psychological Association, June 24, 2021
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Weekly Market Insights: Omicron News Boosts Stocks
December 14, 2021