December 17th, 2021
‘Twas nine days until Christmas and all through the Street, traders were hoping for another winning week. The stage had been set for a run to new highs with retail sales showing holiday shoppers continuing to buy. Chairman Powell dashed hopes for a Santa Claus rally, when the Fed announced that it will end adding to its bond purchase tally. With bond buying to end and rates set to rise, market bulls found their year-end rally on thin ice. With a wink of their nose and a gleam in their eyes, investors sold equities, forcing the Dow 30 down -2.93% from its all-time high.
Investors Say Bah Humbug To Fed’s Announcement
Citing strong economic growth and solid job gains, the Fed announced on Wednesday that it will reduce its bond purchases to $60 billion in January from the $90 billion in purchases it made in December. Markets had been expecting this news for weeks, but nonetheless, the actual announcement reverberated poorly with investors. At the current pace, the purchases should come to an end as early as March. After that, the Fed will begin a series rate hikes. The Fed is currently penciling in three rate hikes for 2022, two in 2023, and two for 2024. Assuming each rate hike is 0.25%, and the Fed stays on its schedule, the Fed funds rate could rise to 1.75% by the end of 2024. A Fed funds rate of 1.75% would still be rather accommodating compared to the historical average of 4.64% and only slightly above the 1.58% pre-pandemic level. The path outlined by the Fed indicates they are still not concerned with the inflation picture, while Main Street may take issue with that assessment. The cautious approach is likely being influenced by the new Covid variants, which have continued to disrupt the consistency of growth from quarter to quarter. Markets initially cheered the Fed’s news since their actual announcement was less aggressive than the signals going into the meeting, but as the week wore on, the reality that money would become more expensive started to set in. Monetary policy remains incredibly accommodative, however, and the Fed’s posture suggests they remain committed to supporting growth as we head into winter with Covid case counts rising once again.
Shoppers Add a Few of Their Favorite Things
It’s beginning to look a lot like Christmas, with holiday shoppers everywhere you go. U.S. retail sales rose 0.30% in November to $639.8 billion and a solid 18.20% from year ago levels. However, November’s sales failed to live up to October’s tough 1.80% comp, which got its boost from those early birds seeking to secure their presents over concerns that store shelves could be empty given the supply bottlenecks. Holiday shopping still appears to be in full swing as we take a look at shoppers’ top gift categories. Sporting goods, musical instruments, and books are high on the list with sales up 1.30%. Food and beverage sales were also up 1.30% with socializing back in vogue after a year of social distancing. Shopping and traveling translated into good times for gas stations, who saw their receipts rise 1.70%. With just one more week until Christmas, the outlook for last minute shopping looks strong as well with many companies now paying fatter paychecks.
Everyone expected the Fed meeting to be the week’s main event and markets drifted lower on Tuesday and Wednesday in anticipation that the Fed would announce a reduction in its bond purchases. Markets reacted positively on both Wednesday and Thursday due to investors’ relief that the Fed choose to stick with its less aggressive path despite the jobs, growth and inflation picture probably justifying a more proactive approach. Interestingly, central banks around the world see the primary macro risks different from one another. Those countries that have experienced inflation in recent memory are choosing to address inflation explicitly by raising interest rates. Those are typically lesser developed countries like Mexico and Russia, the latter of which has raised rates 7 times this year. For them, the risk of inflation and the risk of their citizens losing confidence in their central bank’s credibility is greater than the risk rising rates pose to growth. In developed countries, however, central banks are generally taking the position that growth remains more important than inflation. These countries dominate international trade, meaning that they tend to act in concert so as to not disrupt their currency’s value relative to their trading partners’. They also have good track records, giving them more room to operate before facing a crisis of confidence by their markets and citizens. While the Fed is technically tightening with its tapering, and it has telegraphed that it will begin raising rates in 2022 – a pseudo-tightening effect that influences rate and inflation expectations today – by and large developed countries are continuing to maintain an accommodative posture in support of growth rather than raising rates explicitly to tame inflation. The notable exception being the Bank of England, who this week became the first major central bank to raise rates since the pandemic commenced. The world’s central banks may differ in the rate in which they are tightening, but virtually all of them are now moving in that direction. Investors may have initially found a gift in the Fed not curtailing bond purchase altogether on Wednesday, but rising rates and inflation are now the new reality and they will remain the dominant theme as we enter 2022.
The Week Ahead
With the holidays upon us, the next Week in Review will be on January 7th, 2022. We will have the latest jobs, manufacturing, and services numbers.
The Most Wonderful Time of the Year
The end of the year is a natural time to reflect and take stock of our lives. With the robust economy, solid labor market, and strong investment returns, it’s easy to forget how far we have come during this pandemic, and the immense strides made in just the past eight months alone. Vaccines are undoubtedly a very charged topic these days, but no matter where one might stand on the issue, their introduction along with better treatments have allowed life to begin to resemble something far more normal than when I sat here writing to you all just last year.
The sheer resiliency of humans to rise in the face of adversity has given way to hope, a renewed energy, and a drive within us all to reconnect with friends and family. Linda and I are so appreciative to now have the opportunity to rekindle our relationships with our friends and clients, far and wide. When I think back to moments most special to me this past year, the ability to resume our family’s holiday lunch is certainly at the top of my list. I am incredibly grateful for the celebration shared with my wife, Linda, my sons Sloan and Tyler, my daughters-in-law Jessica and Sarah, and of course my grandsons Caden, Dillon, Glenn, and Porter. It’s said that distance makes the heart grow fonder. In this case, it may have been quarantine that imposed that upon us, but the reunion was all the sweeter with the time that had passed.
Anyone that knows me knows that I hold the Ponies deep in my heart, and the ability to finally attend SMU’s games in person was a particular joy. SMU posted a solid football season this year, and Linda and I enjoyed cheering them on from the stadium. I hope everyone knows how passionate I am about our firm as well. I consider the clients and staff of Probity Advisors to be part of my extended family, and it is for that reason that I was incredibly appreciative when we were finally able to open our office again. It just so happens that we had completed a full remodel of our offices immediately prior to the initial Covid wave, meaning that we hadn’t had the opportunity to host anyone in the new space until this past July.
We continue to accommodate virtual and in-person meetings, but resuming regular, face-to-face interactions has been immensely rewarding and has reinvigorated our entire staff’s commitment to serve. We welcome you to visit any time you are so inclined.
In a word, 2021 was wonderful. Wonderful in the human resiliency we witnessed. Wonderful in the innovations we saw developed. Wonderful in finally being liberated to make personal connections once again. All of us at Probity Advisors, Inc. can’t thank you enough for your friendship and our valued relationship. We hope 2022 will be another wonderful year overflowing with hope, happiness, and good health for you and your loved ones.
Porter L. “Buddy” Ozanne, III
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