​The Markets
 
Is the economy doing well, or not?
 
If you skimmed the headlines last week, you may have seen that retail sales – the purchases we make from stores in-person or online – declined 1.9 percent in December. The statistic may have raised questions about the strength of the economy. After all, how could retail sales move lower during the holiday season?
 
Media headlines speculated that the spread of the Omicron variant, rising inflation, and consumer grumpiness were to blame. Economists had other ideas, according to Logan Moore and Megan Cassella of Barron’s. “Consumers had long been expected to pull forward their holiday shopping to get ahead of any supply chain backlogs, economists say.”
 
As you think back on when you did your holiday shopping, there is another important question to ask: What time frame does the 1.9 percent capture?
 
The retail sales report showed that sales were:
 

• Down 1.9 percent month-to-month (comparing November 2021 to December 2021)
• Up 16.9 percent year-to-year (comparing the month December 2020 to the month of December 2021)
• Up 19.3 percent for the year (comparing 2020 retail sales to 2021 retail sales)

 
So, back to the original question: is the economy doing well, or not?
 
If you are judging based on retail sales – or any other piece of economic data – your conclusion is likely to depend on the time frame the data reflect.
 
For instance, if retail sales are down 1.9 percent from November to December, it tells a different story than if retail sales are up 19.3 percent for the year. The story may also be affected by the fact that 2021’s retail sales gain built on 2020’s gain. Retail sales rose 3.1 percent from 2019 to 2020, despite the pandemic.
 
Of course, the story of the dip in month-to-month numbers could be that we are at an inflection point. Barron’s reported, “While the December report showed an unexpected drop in retail sales from the catapult in spending November data showed, the slowdown is expected to be short-lived. Put more simply: ‘Don’t panic’…”
 
Last week, major U.S. stock indices moved lower, reported Ben Levisohn of Barron’s.

​The Markets
 
Here’s a little story about a group called the Fed…
 
In the 1950’s, then Fed Chair William McChesney Martin described the Federal Reserve as “the chaperone who has ordered the punch bowl removed just when the party was really warming up.”
 
In 2020, the opposite was true. The Fed, along with fiscal policymakers, filled the stimulus punch bowl to the brim to keep the country from falling into a recession or depression. In November 2021, Fed Vice Chair Richard Clarida explained:
 
“The COVID-19 pandemic and the mitigation efforts put in place to contain it delivered the most severe blow to the U.S. and global economies since the Great Depression. Gross domestic product (GDP) collapsed at a nearly 33 percent annual rate in the second quarter of 2020. More than 22 million jobs were lost in just the first two months of the crisis, and the unemployment rate rose from a 50-year low of 3.5 percent in February to a postwar peak of almost 15 percent in April 2020…The fiscal and monetary policy response in the United States to the COVID crisis was unprecedented in its scale, scope, and speed.”
 
That stimulus helped the economy recover quickly. As a result, demand for goods rose and exceeded supply, pushing prices higher. The Fed did not act immediately to tame inflation because its members believed price increases would subside as supply chain issues eased. Then, in November, inflation was 6.8 percent year-over-year, as measured by the Consumer Price Index. The cost of shelter, which typically is not transitory, was up more than 3 percent year-over-year.
 
In December, the Fed adjusted its outlook on inflation, removing the word “transitory,” and accelerated the pace at which it would reduce monetary stimulus (i.e., remove the punchbowl). Fed Chair Jerome Powell explained, “…in light of the strengthening labor market and elevated inflation pressures, we decided to speed up the reductions in our asset purchases. As I will explain, economic developments and changes in the outlook warrant this evolution of monetary policy, which will continue to provide appropriate support for the economy.”
 
Major United States stock indices dropped lower after Powell’s remarks before climbing to new highs in December.
 
Last Wednesday, the minutes of the Fed’s December meeting were released. Investors appeared to be surprised by the changes in the Fed’s change in tone, reported Ben Levisohn of Barron’s. Share prices tumbled again and the yield on 10-year Treasury notes moved higher.

The Markets
 
2021 was a fizzing mints-in-soda kind of year.
 
Everything seemed to shoot higher – from COVID-19 cases and vaccinations to economic growth and global stock markets. Everything except for optimism. As the year came to an end, a CBS News poll found that 40 percent of Americans felt 2021 was mostly filled with sadness, although almost three out of four people polled said they were hopeful for 2022.
 
As we head into the new year, let’s a look back at 2021.
 

• Vaccinations took off. At the start of the year, very few people were vaccinated against COVID-19. Despite issues with vaccine reluctance and availability, by the end of the year more than 58 percent of the world’s population had received at least one dose of a COVID-19 vaccine.  United Arab Emirates led the way with 99 percent of the nation’s population vaccinated. Nigeria lagged with about 95 percent of the population unvaccinated. More than 61 percent of Americans were fully vaccinated, and another 12 percent were partially vaccinated, according to Our World in Data.

 

• United States’ economic growth was stronger than it has been in decades. In December, The Conference Board estimated the U.S. economy grew by 6.5 percent annualized in the fourth quarter of 2021, and 5.6 percent over the full year. That’s the strongest growth in decades, according to Ben Levisohn of Barron’s. The publication reported the lesson of the last century is, “Don’t underestimate the resilience of the U.S. economy.”

 

• Inflation rose faster than it has in decades. Consumer prices increased at the fastest pace since 1982. By December, prices were up almost 7 percent for the year in the U.S., according to The Economist. As rents and wages increased, the Federal Reserve changed the language it used when discussing inflation, removing the word “transitory.” Some economists say inflation will subside in 2022, while others believe it will be more enduring, according to a report from Goldman Sachs.

 

• Consumer sentiment declined and then rose in December. Overall, consumers were less optimistic during 2021, largely because of inflation. About 25 percent of households said inflation was eroding their standard of living.  In December, however, optimism moved sharply higher “…primarily due to significant gains among households with incomes in the bottom third of the distribution. Indeed, the bottom third expected their incomes to rise during the year ahead by 2.8%, up from 1.8% last December,” reported Richard Curtin, the University of Michigan’s Surveys of Consumers chief economist. That’s the biggest gain in 22 years.

 

• The Federal Reserve took a hawkish turn. As inflation persisted, the Fed decided to accelerate monetary policy tightening by tapering bond purchases more quickly than expected. In December, 12 of the 18 Federal Open Market Committee members indicated they anticipate at least three rate hikes in 2022. The increases would lift the Fed funds rate from zero to 0.25 percent to 0.75 to 1.0 percent.

 

• Major U.S. stock indices set record after record. After trading closed on December 31, 2021, “All three major U.S. stock indexes scored monthly, quarterly and annual gains, notching their biggest three-year advance since 1999,” reported Stephen Culp and Echo Wang of Reuters.

 

• Corporate earnings proved resilient. Despite supply chain issues, labor shortages, wage increases and inflation, U.S. company earnings were exceptional. Earnings, which reflect company profits, were up 45.1 percent year-over-year. That’s well above the trailing 10-year average annual earnings growth rate of 5.0 percent, according to John Butters of FactSet.

 

• China cracked down on “capitalist excesses.” “More than $1trn was wiped off the collective market capitalization of some of the world’s largest internet groups...Entire business models – online tutoring, for example – were laid waste. Investors needed to hear that an end was in sight. But on August 8th the Communist Party issued a five-year blueprint aimed at reshaping China’s tech industry – confirming to even the most optimistic industry watchers that the abrasive changes would continue well into 2022,” explained The Economist.

 

• Finding income in the bond market was challenging. “Emerging-market bonds were supposed to be dragged down this year as central banks moved toward withdrawing stimulus. Instead, the best-performing global debt was all from developing nations…South Africa, China, Indonesia, India and Croatia topped the rankings of 46 markets around the world in 2021,” reported Lilian Karunungan and Masaki Kondo of Bloomberg.

It has been an honor to work with you during 2021. We look forward to seeing you in the new year!

​The Markets
 
Investors were feeling bullish.
 
Last week, the Standard & Poor’s 500 (S&P 500) Index closed at a record high for the 68th time this year. That’s the second-highest number of record closes in a single year. The highest number occurred during 1995, when the S&P 500 had 77 record highs, reported Reuters. That was the year the Dow Jones Industrial Average passed 4,000 for the first time and then rose above 5,000, reported Wayne Duggan of Benzinga.
 
“The market deserves to celebrate. [COVID] brought death and dislocation, but we tend to pay too little heed to what didn’t happen. If vaccines hadn’t changed the pandemic’s trajectory, the U.S. would have suffered nearly 1.1 million additional deaths and 10 million more hospitalizations – according to an epidemiological model by the Commonwealth Fund cited this past week in the Journal of the American Medical Association,” reported Bill Alpert of Barron’s.
 
That may be the case, but investors were likely focused on expectations for consumer sentiment, economic growth and corporate earnings.
 
The Conference Board reported that the consumer outlook for income, business and labor market conditions improved significantly in December, rising from 90.2 to 96.9. A growing share of survey respondents plan to buy houses, cars and major appliances during the next six months. The number of people planning vacations increased, too, reported Lucia Mutikani of Reuters.
 
Consumer optimism could bode well for economic growth, which was robust in 2021, up 6.3 percent in the first quarter of the year, 6.7 percent in the second quarter, and 2.3 percent in the third quarter. The U.S. Bureau of Economic Analysis reported, “From the second quarter to the third quarter, spending for goods turned down (led by motor vehicles and parts) and services decelerated (led by food services and accommodations).”
 
Despite the July to September slowdown in GDP, corporate earnings remained unusually strong. Earnings are a measure of companies’ profitability, Analysts estimated that the corporate earnings growth rate for 2021 is 45.1 percent, year-over-year. That’s well above the trailing 10-year average annual earnings growth rate of 5 percent, reported John Butters of FactSet.
 
All sectors of the S&P 500 Index are expected to have had positive year-over-year earnings growth in 2021. Energy, Industrials, Materials, Consumer Discretionary and Financials sectors have experienced the strongest growth.
 
We hope the new year is filled with good health and prosperity.

Guidance Wealth will close beginning at 4:00pm Thursday December 23rd for the Christmas Holiday and will re-open on Monday December 27th. 
  
The Markets
 
Stock and bond markets diverged.
 
Last week, the Bank of England surprised markets with a rate hike, its first in three years, and the Bank of Mexico raised rates more than expected. Both cited persistent inflation as the reason for the increases, reported Carla Mozée of Markets Insider.
 
In the United States, the Federal Open Market Committee (FOMC), which is the group that decides how the U.S. central bank (the Federal Reserve or Fed) will manage monetary policy, met last week and decided to become less accommodating more quickly.
 
With inflation at high levels and employment at full pandemic capacity, the Fed will take steps “to prevent higher inflation from becoming entrenched,” announced Fed Chair Jerome Powell. FOMC median projections suggest the Fed funds rate will rise from its current range (zero to 0.25 percent) in 2021 to 0.90 percent in 2022, and 2.1 percent by 2024.
 
San Francisco Federal Reserve President Mary Daly told The Wall Street Journal, “If we see that the economy is delivering high inflation, even if we expect that inflation to not persist past the pandemic, and we see the labor market is extremely tight, even though we don't expect that to be true past the pandemic, then the policy action that would be appropriate is, after tapering, to raise the interest rate,” reported Ann Saphir and Howard Schneider of Reuters.
 
Major U.S. stock indices declined following the FOMC meeting, reported Ben Levisohn of Barron’s. The reason for the decline is unclear since research suggests that, historically, stock markets have moved higher following rate hikes. Anne Sraders of Fortune reported:
 
“Analysts at Deutsche Bank identified 13 separate hiking cycles since 1955, which lasted an average of under two years. And according to their research, which examined the average price performance of the S&P 500…‘there tends to be solid growth in the first year of the hiking cycle, with an average return of +7.7% after 365 days…’”
 
As stock markets declined, bond markets rallied. Yields on Treasuries of many maturities finished the week lower.7 That was surprising because the Fed raises the Fed funds rate to push interest rates higher. However, bond investors appeared to be more concerned about the spread of the Omicron variant of COVID-19, reported Yun Li and Vicky McKeever of CNBC.  
 
“The world will not see a re-run of the spring of 2020, with jaw-dropping drops in [economic growth]... Even so Omicron—or, in the future, Pi, Rho or Sigma—threatens to lower growth and raise inflation. The world has just received a rude reminder that the virus’s path to becoming an endemic disease will not be smooth,” reported The Economist.

Guidance Wealth will close beginning at 4:00pm Thursday December 23rd for the Christmas Holiday and will re-open on Monday December 27th. 
 
The Markets
 
Inflation met expectations.
 
When the Bureau of Labor Statistics released the Consumer Price Index (CPI) last week, it showed that inflation was at levels last seen in 1982. In November, prices were up 0.8 percent month-to-month and 6.8 percent year-to-year.
 
“It was the blowout, superhot inflation number that everyone was expecting—and it was met with a shrug,” reported Ben Levisohn of Barron’s. “The major indexes, for their part, rose a touch on Friday to finish what turned out to be a fantastic week: The S&P 500 gained 3.8% to hit a new high, while the Dow Jones Industrial Average rose 4.0% and the Nasdaq Composite gained 3.6%.”
 
The bond market’s response to the CPI was unexpected, as well. “Indeed, Treasury inflation-protected securities were saying price pressures in future years will be abating instead of getting worse,” reported Randall W. Forsyth of Barron’s.
 
Forsyth was referring to the breakeven rate, which is the difference in the yields of Treasuries and the yields of inflation-protected Treasuries with the same maturities. The breakeven rate is a measure of investors’ inflation expectations for the next five years. On Friday, the 5-year Breakeven Inflation Rate was 2.76 percent. That was below its November high of 3.17 percent.
 
The financial markets’ tepid response to the CPI sparked debate about whether inflation has peaked.
 
No matter which side of the argument you come down on, “The surge in inflation since the start of 2021 means that it is guaranteed to remain elevated in annual terms for a while to come. A relatively optimistic forecast would have inflation returning to its pre-pandemic norm only at the very end of 2022,” reported The Economist.

​The Markets
 
Investors look to the future.
 
Last week, employment and manufacturing data confirmed that the United States economy continued to strengthen in November, but positive economic news was overshadowed by investors’ concerns about the spread of coronavirus and Federal Reserve policy.
 
Let’s start with the economic news.
 
More Americans were working. The Bureau of Labor Statistics (BLS) reported that unemployment dropped to 4.2 percent in November – a level the country wasn’t expected to achieve before 2024, according to Eli Rosenberg of The Washington Post. The labor force participation rate improved, too, meaning that more people are returning to work.
 
Fewer new jobs were created than analysts expected, but that wasn’t surprising given the BLS’ track record during the pandemic. From June through September, it underestimated employment gains by 626,000, according to Andrew Van Dam of The Washington Post. In the latest report, the BLS revised October’s numbers to be higher by 15,000.
 
Manufacturing strengthened. The manufacturing industry made gains in November, too. The Institute for Supply Management Purchasing Managers’ Index (PMI) came in at 61.1 for November. The reading for new orders, which measure future demand, was 61.5. “A [PMI] level of 50 indicates that the manufacturing economy is growing. Above 60 is a very strong level,” reported Allen Root of Barron’s.
 
Positive economic data didn’t inspire investors last week, though. That may be because economic data reflects what has happened in the past. Investors are more concerned about what may happen in the future and how markets may be affected. As a result, investors focused on:
 
The Omicron variant spread. Last week, a new variant of the coronavirus spread in the U.S. states. Initial indications suggest Omicron may be milder than previous variants, reported Deena Beasley of Reuters. However, that did not quell investors’ concerns. Josh Nathan-Kazis of Barron’s reported:
 
“Fearing new lockdowns that had been ruled out as recently as a week ago, investors are at times panic-trading based on anecdotes and passing comments by CEOs. The S&P 500 index moved more than 1% nearly every day this week, gyrating up and down on new guesses about what Omicron will mean for the world.”
 
Federal Reserve policy changes. Investors pondered Fed Chair Jerome Powell’s testimony before the Senate Banking Committee. Powell “…reiterated that he and fellow policymakers will consider at their upcoming meeting a faster wind-down to the Fed's bond-buying program, a move widely seen as opening the door to earlier interest rates hikes,” reported Jonnelle Marte and Lindsay Dunsmuir of Reuters. Historically, rising interest rates have slowed economic growth.
 
Major U.S. stock indices finished the week lower, according to Ben Levisohn of Barron’s. U.S. Treasury yields moved lower.

​The Markets
 
COVID-19 strikes again.
 
Coronavirus cases have been on the rise in Europe, climbing from about 700,000 new cases a week in September to 2.6 million a week in November, reported Richard Pérez-Peña and Jason Horowitz of the New York Times. As Thanksgiving approached, there was concern that travel and togetherness could increase the number of cases in the United States, too, creating stress on already taxed healthcare systems. Jamie Smyth and Caitlin Gilbert of the Financial Times explained:
 
“…what was expected to be a celebration has become fraught with danger in some Midwestern states, where vaccination rates are low and COVID-19 cases are rising rapidly after a summer lull…Nationally, cases have increased by nearly 30 percent since the beginning of the month…”
 
Financial markets took the fall surge in stride. They were less sanguine when news broke last week that a new variant of coronavirus, called “omicron,” had been identified in South Africa and was spreading.
 
Little is currently known about omicron. In Nature, Ewan Callaway reported the variant has a significant number of mutations, which is concerning. Scientists are tracking omicron’s spread and working to “understand the variant’s properties, such as whether it can evade immune responses triggered by vaccines and whether it causes more or less severe disease than other variants do.”
 
Global stock indices and oil prices dropped sharply on Friday, which was a holiday-shortened trading day, reported Chris Prentice and Carolyn Cohn of Reuters. U.S. Treasury bonds rallied as bond prices were pushed higher by investors seeking lower-risk opportunities. FactSet reported:
 
“[The Standard & Poor’s 500 Index] logged its worst day since late February and all major indices finished the week in negative territory. All sectors ended lower with moves highly influenced by today's [COVID-19] variant concerns…Healthcare held up best...”
 
Although it was overshadowed by news of a new coronavirus variant, the pace at which the Federal Reserve will tighten monetary policy (to keep inflation in check) also was on investors’ minds last week. Reuters reported that strategists at Goldman Sachs expected the Fed to tighten faster than anticipated, suggesting that interest rates could move higher sooner.

Please take note of our change in office hours for the Thanksgiving Holiday.  Our office will be closed Thursday, November 25.  Friday, November 26, our office will be open from 10:00 am until 3:00 pm.
  
The Markets
 
Thinking about the possibilities.
 
The Standard & Poor’s (S&P) 500 Index finished last week slightly higher and has gained about 6 percent during the past 25 days; however, investors have curbed their enthusiasm. The S&P 500 hasn’t experienced a move of one percent or more in 25 trading days. That’s the longest period without a move of that size in about two years, according to a source cited by Avi Salzman of Barron’s.
 
It’s possible investors are taking time to think about the current mix of conditions and how the economy and financial markets may be affected. For example:
 

• Consumers have said they’re concerned about inflation. The University of Michigan’s Consumer Sentiment Index declined in early November on a year-to-year and a month-to-month basis. Survey participants indicated their outlook was negatively affected by inflation concerns, reported Surveys of Consumers Chief Economist Richard Curtin.

 

• Retail sales were higher than expected. There was a difference between what consumers said and what they did. Despite inflation concerns, retail sales were up 1.7 percent from October to November and 16.3 percent year-over-year, reported Jeff Cox of CNBC.

 

• Companies were very profitable during the third quarter. Supply chain issues and inflation were frequently mentioned by companies during earnings calls, but they didn’t affect corporate profits. The majority (82 percent) of companies reported higher than expected earnings per share. On average, company profits were up 39 percent year-over-year, which was the strongest growth since 2010, reported John Butters of FactSet.

 

• The oil shortage may already be over. Oil prices dropped last week. A surge of COVID-19 cases in Europe is expected to slow demand just as supplies may increase as some countries begin to release oil from strategic petroleum reserves, reported Avi Salzman of Barron’s. During the past decade, oil prices have accounted for about 56 percent of the price of a gallon of gasoline, according to the U.S. Energy Information Administration. As oil prices fall, gasoline prices also may move lower.

 
The performance of major U.S. stock indices was mixed last week, according to Avi Salzman of Barron’s. The yield on 10-year U.S. Treasuries dropped last week.
 
We hope you have a wonderful Thanksgiving.

Please take note of our change in office hours for the Thanksgiving Holiday.  Our office will be closed Thursday, November 25.  Friday, November 26, our office will be open from 10:00 am until 3:00 pm.
 
 The Markets
 
Economists like to joke that inflation is just right when no one notices it.
 
Last week, investors noticed it. The Consumer Price Index (CPI), which is a measure of inflation, rose 0.9 percent in October and 6.2 percent over the last 12 months, according to the Bureau of Labor Statistics. (When volatile food and energy prices were excluded, the CPI was 4.6 percent for the period.)
 
That’s the highest level for inflation in 30 years, according to The Economist, and well above the United States Federal Reserve’s policy goal of two percent inflation over the longer term.
 
Uncertainty about the nature of inflation has left the U.S. Federal Reserve wedged in an uncomfortable policy position. The Economist explained: 
 
“As inflation has accelerated economists and officials have debated whether it is a transitory phenomenon—reflecting overstretched supply chains—or a more persistent problem. It is far more than an academic debate. If inflation is short-lived, the right move for the Federal Reserve would be to look through it, aware that jacking up interest rates may do more harm than good. If, however, inflation is stubbornly high, the central bank is duty-bound to tame it,”
 
Taming inflation could mean tapering bond buying and raising rates more quickly than planned and higher rates tends to slow and, sometimes, stall economic growth.
 
When making policy decisions, Personal Consumption Expenditures (PCE) is the Fed’s preferred inflation gauge. The readings for the CPI and the PCE rely on information from different sources.
 
“The CPI uses data from household surveys; the PCE uses data from the gross domestic product report and from suppliers. In addition, the PCE measures goods and services bought by all U.S. households and nonprofits. The CPI only accounts for all urban households,” reported Fanglue Zhou of Callan Associates.
 
PCE data will be released on November 24.
 
Major U.S. stock indices retreated a bit last week, according to Ben Levisohn of Barron’s, leaving the Standard & Poor’s 500 Index up 24.7 percent year-to-date. The yield on 10-year U.S. Treasuries rose last week.