​The Markets
 
Last week, the January stock market decline was interrupted by a Friday afternoon rally.
 
“The S&P 500 rose 2.4 percent, its biggest one-day jump since June 2020, while the technology-heavy Nasdaq composite rose 3.1 percent. Friday’s gain snapped a three-day streak of losses and left the S&P 500 up 0.8 percent for the week, its first weekly gain this year,” reported Coral Murphy Marcos of The New York Times.
 
The change in direction may have reflected:
 

• Confidence in the resilience of the U.S. economy. The U.S. economy grew 6.9 percent in the fourth quarter of 2021, despite the spread of the Omicron variant. Over the full year, the economy expanded by 5.7 percent. It was the strongest quarterly growth since 1972 and the strongest annual growth since 1984, reported the Bureau of Economic Analysis.

 

• Strong corporate profits. One-third of the companies in the Standard & Poor’s 500 Index have shared how well they did during the fourth quarter. So far, profits were up about 24 percent for the quarter and more than 45 percent for the full year, as measured by the blended earnings growth rate. Above-average earnings growth reflects easy comparisons to weaker earnings in 2020, as well as strong earnings growth in 2021, reported to John Butters of FactSet.

 

• A buy-the-dip impulse. After three consecutive weeks of declines, the S&P 500 is down about 7 percent for the year. Some investors may have identified buying opportunities created as the market repriced in anticipation of rising interest rates.

 
It’s difficult to know which direction markets will go next; however, an asset manager cited by Nicholas Jasinski of Barron’s characterized the January drop as:
 
“…a ‘garden variety technical correction,’ as opposed to a more pernicious cyclical downturn or systemic problem facing the market. Stocks aren’t falling because analysts are lowering profit forecasts en masse, or because economists are predicting a recession on the horizon. Instead, the correction has taken place because of how richly the market is valued.”
 
Major U.S. stock indices were flat or up for the week, according to Al Root of Barron’s. The yield on 10-year U.S. Treasuries rose during the week before subsiding.

​The Markets
 
When is a barometer not a barometer?
 
It’s widely recognized that people do not make perfect financial decisions. In fact, many investors rely on mental shortcuts when asked to make complex decisions. That may be why there are theories that correlate stock market performance to football, hemlines and sales of headache remedies.
 
For example, last week several articles about the U.S. stock market used the adage, “As goes January, so goes the year.” The saying describes the January Barometer, which holds that the performance of the Standard & Poor’s 500 Index in January has predictive value. If stocks gain in January, then the Index may gain over the full year. If stocks decline in January, then the Index may suffer losses over the full year.
 
According to Jeffrey Hirsch and Christopher Mistal of the Stock Trader’s Almanac, the January Barometer has been 84.5 percent accurate since 1950. Of course, the January Barometer was invented in 1972, and when you evaluate its performance since then:
 
“The January Barometer, in fact, fails real-time tests at the 95 percent confidence level that statisticians often use when determining whether a pattern is genuine. Since 1972 its track record is indistinguishable from a random pattern,” wrote Mark Hulbert in MarketWatch.
 
You don’t have to look far to find flaws in the pattern.
 
In 2021, the Standard & Poor’s (S&P) 500 Index fell during the month of January and gained 26.8 percent over the full year. The same thing happened in 2020. The S&P 500 declined in January and finished the year with a gain of more than 16 percent. Perhaps this phenomenon will one day be known as the “Pandemic Exception.”
 
The real takeaway from the past two years isn’t that the January Barometer is flawed, it’s that the U.S. economy, companies and financial markets have proven to be quite resilient.
 
Last week, major U.S. stock indices moved lower on uncertainty about inflation, the pandemic and Federal Reserve policy, reported Mark DeCambre of MarketWatch. The Dow Jones Industrial Average declined 4.6 percent. The S&P 500 was down 5.7 percent, and the Nasdaq Composite dropped 7.6 percent, reported Ben Levisohn of Barron’s.

​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!