Stocks ended lower for the week, as the prospect of Fed “tightening” and greater-than-anticipated impact by the Omicron variant sparked considerable volatility. As longer-term interest rate expectations increase, growth stocks and the technology-heavy Nasdaq Composite Index tend to fare poorly. Last week, the latter touched an intraday low on Friday that was roughly 7% below its recent peak—still above the 10% threshold for a correction. Technology shares also performed worst within the S&P 500 Index, while the typically defensive utilities, health care, and consumer staples sectors managed gains. Volatility to end the week was also influenced by a “triple witching”—the expiration of three types of options and futures contracts on Friday. The Cboe Volatility Index (VIX) rose for the week but remained well below its levels early in the month.
The Federal Reserve’s monetary policy meeting on Tuesday and Wednesday appeared to dominate sentiment for much of the week. The major indexes dropped sharply on Tuesday morning, after a report that producer prices jumped 9.6% in November from a year earlier, the biggest increase since data were first collected in 2010. This data heightened speculation that Fed officials would signal more rate hikes in 2022. Indeed, the Fed’s quarterly survey of individual policymakers’ views, released Wednesday, showed that a majority of officials now expect three one-quarter-point hikes in 2022, instead of two. The Fed also announced a faster tapering of its monthly asset purchases, which are now expected to stop by the end of March.
Stocks actually rose after the Fed’s announcement, which was attributed to a sense of relief that the Fed did not act more aggressively. Investors may have also been reassured by Fed Chair Jerome Powell’s press conference, in which he expressed confidence in the state of the economy. Retail sales data released earlier Wednesday showed that consumers reduced spending on an inflation-adjusted basis in November, but Powell stated that “consumer demand is very strong” and suggested that the pullback might have been due to an extended holiday shopping season. Gauges of current economic activity released on Thursday came in modestly below expectations but still indicated robust expansion, while housing market indicators surprised to the upside.
Powell also stated that the Omicron variant, although a risk to the Fed’s outlook, did not justify a change in the Fed’s tapering program. Omicron fears appeared to grow later in the week, however, especially as some Wall Street firms put new office restrictions in place in response to a surge in cases. The stock selloff, which is continuing into the start of this week, may be cushioned by growing evidence that Omicron, while much more contagious, causes less severe symptoms than prior variants.
It’s important to remember that the Fed doesn’t want the “party to stop,” but it also knows its history. The market, however, is like a partygoer who begins to “boo” the DJ when his favorite song starts to fade into the next one. No song can play forever, and it appears clear that enduring some “pain” in the form of rate increases, today, should yield a more sustainable economic rise, into the future. As always, there is wisdom in seeking a long-term perspective, and, like Moses, “(who) chose to be mistreated along with the people of God, rather than to enjoy the fleeting pleasures of sin” (Hebrews 11:25), sometimes the path to long-term gain is less than enjoyable.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.