December 3rd, 2021
Traders barely had time to settle into their seats following the Thanksgiving holiday before a new Covid variant and Fed policy shift flustered markets. Just as shoppers were heading to the stores on Black Friday, South African scientists sounded the alarm on a new Covid-19 variant, formally classified as B.1.1.529 – or Omicron. The Dow Jones Industrial Average plunged 900+ points on the news over concerns Omicron could be more contagious and more resistant to vaccines than the prevalent Delta strain. Such a scenario could be a setback for the global recovery and increase the strain on global supply chains, leading to even higher prices. Despite the market’s knee jerk reaction, little is known regarding the transmissibility and severity of the new variant. While investors were reeling from the news of a new Covid-19 variant, Federal Reserve Chairman Jerome Powell added another factor for investors to fret upon. Speaking before a Senate panel, Powell insinuated that the central bank could soon accelerate its bond tapering. The news caught markets flatfooted, having been convinced by the central bank’s previous decree that it would gradually wind down its bond-buying and lift rates slowly in 2022. Citing a strong economy and growing inflationary pressures, the announcement signals the Fed is shifting to a more hawkish posture than markets had anticipated. With investors glued to these headlines, most economic readings fell by the wayside. The ISM Manufacturing Index showed factories floors were booming in November as they sought to get their goods to Santa for an on-time delivery. Consumers also seemed to be in the holiday spirit throughout the month, socializing and pushing the ISM Services PMI to a new record high. Investors looked ready to take advantage of the week’s volatility at times, but a weaker than expected jobs report on Friday deflated the mood. For the week, the Dow finished lower by -0.91%.
Factory Floors Booming to Beat the Holiday Rush
It’s crunch time for manufacturers with only 21 days left until Christmas. The ISM Manufacturing Index rose to 61.1 in November, up from 60.8 in October. Readings above 50 indicate expansion while numbers below 50 indicate contraction, while readings above 60 are considered exceptional. With demand strong, manufacturers continued to pass price increases along to consumers with the survey’s measure of prices paid by manufacturers hitting 82.4 in November. Robust demand also spurred factories to increase their hiring, pushing the employment index to 53.3%. That was its highest reading in seven months. Demand looks to be strong heading into 2022 but the rise of Omicron could throw a wrench in business and consumer spending plans with countries already beginning to implement travel restrictions and shutdowns.
Consumers Ready to Mix and Mingle
The holidays are here, and consumers are ready to celebrate it with family and friends. The ISM Services Index rose to 69.1 in November, up from 66.7 in October. November’s reading was the index’s fifth record high of 2021. Needless to say, business was booming with all 18 industries reporting growth and the business activity index hitting 74.6, up from 69.8 in October. Employment also rose, increasing to 56.5 in November. That was up from 51.6 the previous month. Similar to the manufacturing sector, the outlook for services remains strong heading into 2022, but with the sector being more dependent on face-to-face interactions, Omicron could be disruptive if the variant proves to be more transmissible or more effective at evading the vaccines than previous variants.
Investors Served Coal with Jobs Miss
Markets were disappointed with November’s job report, which showed that businesses added a mere 210K to the payrolls. That was down from both October’s 546K new hires and estimates of 573K new jobs for November. Despite the miss, the unemployment rate fell 0.40% month-to-month to 4.20%. That was encouraging as it coincided with rising labor force participation. Professional and business services and transportation and warehousing led the gains. Meanwhile, job growth was sluggish in leisure and hospitality and declined in the retail sector despite November being one of the busiest times of year. While the top line miss garnered the media’s attention, the overall jobs report was rather good, suggesting the labor market is pretty much at full employment even though there are still technically 5 million less workers in the workforce compared to levels prior to the pandemic.
It was a bumpy ride on Wall Street this week. Markets oscillated between fear and dip buying as investors came to terms with the Omicron variant and the Fed’s hawkish tone. Ignoring the sensationalism, scientists still need more time to determine what the true impact Omicron might have on health and business. What we do know is that the economic data continues to be exceptionally strong despite the prevailed headwinds already being blown by Delta. As of Dec. 1, the Atlanta Fed’s GDPNow is forecasting Q4 2021 GDP to be 9.70%. That’s a significant buffer for the economy even if consumers do pull back on their holiday spending plans due to Omicron, and for that reason, the Fed’s shift to a hawkish tone is likely justified. The pattern has been for Covid to disrupt spending in the short-term, only to pack it into later periods – snarling supply chains and resulting in higher prices. Investors had been lulled into a false sense of security by believing that the Fed would remain dovish until at least mid-2022, but this week revealed that the real Scrooge on Wall Street was not so much Omicron as it was the Fed itself.
The Week Ahead
Consumers have been feeling the sting of higher prices in the grocery store aisle, at the ticket counter, and the apartment leasing office. We’ll see if the trend continues with the November CPI report. Across the globe, we’ll check in on global demand with the latest Chinese export and import numbers.
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Ten Year-End Planning Reminders
Below are some end-of-the-year planning steps you may wish to consider to keep your financial plan on track and be prepared for 2022. Everyone’s financial situation is unique, and this is not a comprehensive list of all financial planning and tax planning strategies. Please consult your tax advisor and your financial advisor for guidance concerning your specific circumstances.
1. Make Retirement Contributions: Contribute to tax-advantaged retirement accounts, including catch-up contributions, before the end of the year to maximize tax savings. Note that you have until tax day of the following year to establish and/or contribute to an IRA for the prior tax year, but contributions to 401ks and other qualified plans must be made by December 31st. If you are self-employed, consider establishing a solo 401(k) before December 31st, and fund any existing solo 401(k) or SEP IRA prior to filing your tax return.
2. Review Your Budget: Now is a good time to review your spending patterns over the past year. If money was tight or if you had a surplus, your financial advisor can help you identify and make any adjustments that might be needed.
3. Take your Required Minimum Distribution (RMD): RMDs were waived in 2020, however, they are back in 2021. The IRS requires individuals to take their RMD by April 1 of the year following the calendar year in which you reach age 72 (70½ if you turned 70½ before Jan 1, 2020) and by December 31 each subsequent year.
4. Consider a Qualified Charitable Distribution (QCD): If you are over age 72, consider giving to charity directly from your IRA. A QCD can reduce your taxable income. Each IRA owner may contribute up to $100,000 directly to charity from their IRA each year. If you would like to make a distribution from your IRA at Probity Advisors, Inc., please let us know as soon as possible. Many of the rules for RMDs apply to inherited accounts so you should contact your tax advisor and financial advisor regarding your specific situation.
5. Make Annual Gifts: If you choose to make charitable contributions, you may wish to consider gifting stock rather than cash. When you decide to gift long-term appreciated shares directly to a charity — rather than sell securities and gift the cash — you potentially get to take a reduction for the full fair market value of shares and avoid tax on any long-term capital gain. This is often an underutilized gifting mechanism that many of our clients have found to be an excellent strategy for fulfilling philanthropic desires while simultaneously providing a tax benefit.
Another opportunity for gifting is to utilize the annual gift tax exclusion. Every individual may make tax-free, annual exclusion gifts of up to $15,000 in 2021 without counting toward the lifetime exemption from federal estate and gift tax. This is a “use it or lose it” exclusion, so be sure to send gifts for receipt prior to December 31st. This is a per-person limit, so you can make gifts to as many people as you like. Also, remember that assets gifted to individuals during your lifetime retain their original cost basis. Assets inherited at death receive a “step-up” in basis at death under current legislation, but this could change. Consult your advisors to determine the best gifting strategy for you.
6. Consider a Roth Conversion: Whether a Roth conversion is right for your particular situation involves consideration of a number of complex factors. A Roth conversion occurs when you move assets from certain types of pre-tax retirement accounts to a Roth IRA. The benefits include tax-free withdrawals in retirement, no required minimum distributions, and the option to leave an income-tax-free legacy to the next generation. However, there may be tax ramifications, and your tax advisor and your financial advisor can help you weigh the potential benefits and disadvantages.
7. Spend Flexible Spending Account (FSA) Dollars: Unused funds in FSAs are typically forfeited at year end, so be sure to use the funds for eligible health and medical expenses by December 31st. Some plans my not follow the calendar year, so check with your plan to confirm deadlines.
8. Check Tax Withholdings: If you changed jobs in 2021, check your tax withholding to help avoid having too little tax withheld which could result in an unexpected tax bill or penalty at tax time next year.
9. Review Your Insurance Policies: Review your home, automobile, and life insurance policies to determine if you have enough coverage or if deductibles need to be adjusted.
10. Update Mailing Address (if needed): If you’ve had a change of address in 2021, please notify our office and any other financial advisors and institutions you may work with.