You’ll Shoot Your Eye Out
As you progress through life, the things you desire most will most likely change. A child with few worries about the outside world may want nothing more than receiving a special toy as a gift. Perhaps this toy would be a Red Ryder BB Gun, as was longed for by a young Ralphie Parker in the classic film, “A Christmas Story.” When you get older into adulthood, you are likely to concern yourself with bigger issues and certain “toys,” which instead of BB guns might be hunting rifles, golf clubs or even a boat, may still be wanted but in the big picture they often become less important than items of greater significance in your life. For those saving for retirement, one of their greatest wishes, if not the greatest, may be to ensure they have accumulated enough money to continue to support their income and lifestyle. Regardless of what you might yearn for most, anyone reading this is most likely wanting a stock market to continue the upward trajectory it has generally been on over the past decade.
Unfortunately, this was not the case last week with the stock markets moving lower, which was primarily attributed to the Federal Reserve (the Fed) meeting in the middle of the week. Markets traded lower early in the week in anticipation of this meeting and as expected the Fed announced they were going to reduce their monthly bond buying program faster than when this taper was announced last month. It is now forecasted the program will be wrapped up in March, setting the stage for an interest rate hike in June, or possibly sooner, with projections for three total rate hikes in the year. The stock markets reacted positively to this announcement on Wednesday, even though it was widely anticipated, because there was some concern the Fed would take more drastic measures to combat inflation such as further speeding up the taper of the bond buying program or even raising rates immediately.
Many stocks, specifically many technology companies, were hit particularly hard later in the week due to worries over higher interest rates and slowing economic activity. This might mark the beginning of a shift from momentum stocks, which have performed very well over the past few years, and into more of the value sectors as the markets pay more attention to valuations in a rising interest rate environment. There was relatively little change in the narrative surrounding the Omicron variant, but it does remain an overhang and therefore causes continued headwinds to the market.
The Biden Administration’s Build Back Better spending bill had its tongue stuck to a frozen flagpole over the weekend with Sen. Joe Manchin announcing he would not be supporting the bill, effectively killing it. If this bill would have passed it could have produced a short-term catalyst to push markets higher since it introduces a high level of government spending, but in the long-term it was likely to cause even more inflation and potentially be a drag on economic growth from higher levels of government debt. There is always a chance the parties will continue talks and come to an agreement which would resurrect the bill, but chances are minimal and if that were to occur it would not be until sometime in 2022.
The Soft Glow…
A soft glow is a stark contrast to burning bright with the former a reference to the “major award” (aka leg lamp) won in a contest by the Old Man (Ralphie’s father) in the aforementioned movie while the latter could be used to describe the current state of inflation. The Producer Price Index (PPI), a measure of wholesale prices of goods before they are sold to consumers, last month rose more than analysts’ estimates at a record high pace of 9.6% compared to a year ago. These price increases are generally passed along to consumers and with PPI increases accelerating it is very likely consumer prices will continue to move higher in coming months. We expect inflation to remain a large threat to investors’ returns in 2022 and beyond.
Last week retail sales for the month of November were reported and came in less than expectations, but still showed a monthly increase in spending by consumers. Previously October retail sales were reported noticeably stronger than expectations, so the thought is the most recent numbers reflect consumers pulling forward holiday shopping because of concerns about product availability due to supply chain issues. Indications remain that holiday spending this year will surpass previous years and be the highest on record, which can be attributed to greater personal wealth and higher household incomes thanks to a strong stock market, solid labor market and stimulus payments. We monitor consumer spending closely since it comprises over two-thirds of GDP and we will remain especially watchful going into the new year when spending traditionally slows down and now that the stimulus payments have ended but remain optimistic for continued strength in spending from increasing wages and a robust employment situation.
Looking Ahead
With the year winding down and major holidays approaching, we would expect the markets to get quieter. Trading volumes are decreasing, as tends to be the case this time of year. On the economic front, there are some key data releases coming up this week including consumer confidence, durable goods orders, and personal consumption expenditure (PCE) price index, which happens to be the Fed’s preferred measure of inflation. Given the holiday and lower trading activity we do not expect any of these to have a major impact on the markets unless there is a major surprise, either to the downside or upside. We follow these numbers closely since they provide signals about the health of the economy and can impact how the stock market reacts. With recent market events, we will also be keeping a vigilant eye on how various sectors perform over the next few weeks to look for indications on which direction the market might be headed and what we think the new year will bring so we can best position our clients’ portfolios to protect against risk and capitalize on opportunities.
We remain hopeful for a year-end Santa Claus rally in the stock market, which would satisfy the author’s Christmas wish. If this does not come to fruition, settling for a leg lamp might not be so bad since the market has already provided another great year of returns. As always, we remain available to discuss market events and portfolio positioning. With 2021 winding down, it is time to start looking ahead to 2022 and consider how the world might be different going forward. But for this week, hopefully you are able to spend time with family or friends to celebrate the holiday. If Santa does bring you a Red Ryder BB gun, don’t shoot your eye out.
Wishing you all a very Merry Christmas!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Secured Retirement
nzeller@securedretirements.com
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
info@securedretirements.com
Office phone # (952) 460-3260
