This Month's Newsletter

It’s a little hard to believe that 2021 is almost in the books. Hopefully you find a quiet moment to reflect on the past year and to think about all of the gifts you may have received – tangible or intangible.

One ‘gift’ none of us were looking forward to is another variant of COVID. The World Health Organization designated the newest strain a ‘variant of concern’ and gave it the Greek letter Omicron. Existing vaccine efficacy against Omicron’s mutations is unknown, though the drug companies are striking a confident tone. Still, markets reacted negatively to news and sold off sharply in a shortened trading session on Friday, November 26th.

How worried should we be about Omicron's economic impact? Supply chains have been playing catch-up all year, so the new variant could increase delays if countries choose to tighten restrictions. Consumer spending has been robust heading into the holiday season, so even if tighter restrictions return to bars, restaurants, and stores, we may see a dip rather than a full disruption in spending patterns.

In short, there’s a distinct possibility that Omicron’s impact is limited to a few bad trading days at the end of the year. At worst, Omicron’s impact may end up being like easing off the economic accelerator rather than slamming on the brakes – though the situation remains fluid and new information could alter the outlook.

Stocks

Stocks were mostly negative this month as the market digested news of the latest COVID-19 variant and the potential implications of tightening monetary conditions.

Energy retained its spot as the top-performing sector this year, however, not without a volatile November. Real Estate leap-frogged into the top-three by losing less than Financials, which dropped nearly 6% in November.

Industrials, Consumer Staples, and Utilities each suffered a down month in November, though year-to-date performance remains positive.

Bonds

The market retreated from stocks in favor of bonds, nudging performance into positive territory for the month. Despite the bump, bonds remain negative year-to-date.

Economic Update

President Biden re-appointed Jerome Powell as head of the Federal Reserve – good news for those hoping for continuity at the central bank. Powell concluded his term by signaling his desire to tighten monetary conditions by inching up interest rates and tapering the Fed’s bond purchases. Now that he’s been reappointed, expect the Fed to follow through on those two policies. If the market hates anything, it’s uncertainty.

As Powell begins his next term, we find ourselves in a three-way stand-off between the Fed, the pace of economic growth, and the rate of inflation.

The Fed’s decision to drop interest rates to zero and pump billions of liquidity into the system doused the recessionary fire caused by the global pandemic. However, while the economy recovered faster than any recession before, the amount of money circulating in the system helped send inflation to levels not seen since the 1990s.

Historically, the Fed uses higher interest rates to attack inflationary conditions. The thinking there is that a higher cost to borrow money will discourage spending and encourage saving, giving the economy time to find a healthier equilibrium between supply and demand.

So, why not stop printing money and raise interest rates right now – just get it over with? There are very real concerns that moving too quickly could trigger another recession just as the economy is finding its footing (November’s unemployment rate came in at 4.2%, a few points from pre-pandemic levels) – drastic action often begets drastic results. Meanwhile, the pace of inflation may force the Fed to raise rates before they intended.

And so, while we wait to see how the situation evolves, we believe that a diversified portfolio aligned to disciplined, long-term approach is the best way to navigate market uncertainty.

Outlook

Here’s what we’re watching in the month ahead:

November inflation figures. Inflation – as measured by the Consumer Price Index – came in 6.2% higher in November 2021 than November 2020. Will the pace continue, or will the Fed’s tapering help cool off prices?

Retail sales data. Despite in-person shopping volume dropping 28% this Black Friday, retail sales are expected to be 8.5% to 10.5% higher this year, according to the National Retail Federation. That’s good, as robust consumer spending implies a resilient economy. The report comes out December 15^th.

Market volatility. With a double-digit year likely, expect some volatility in the final weeks of the season as investors rebalance portfolios for tax-loss harvesting or other end-of-year activities.