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Late gains helped the large-cap benchmarks move higher for the week, but not before most major indices moved temporarily into correction territory—down more than 10%—from recent highs. The small-cap Russell 2000 Index lagged and ended the week down nearly 20% from its November peak, leaving it just outside of a “bear market.” Volatility, as measured by the Cboe Volatility Index (VIX), reached its highest level since the early months of the pandemic. Energy stocks rallied, with international oil prices pushing above $90 per barrel. This move was driven, in part, by the continued massing of Russian troops along the border with Ukraine.
Fears that the Federal Reserve might be “behind the curve” on inflation and forced to raise short-term interest rates quickly weighed heavily on sentiment. The Fed’s monetary policy committee met during the week and kept interest rates steady, as expected. In his post-meeting press conference on Wednesday, however, Fed Chair Jerome Powell left open the possibility that policymakers would raise rates in 2022 more than the three quarter-point hikes they had signaled after their December meeting, with the first increase coming in March.
Wall Street seemed primarily focused, however, on the Fed’s plans to reduce its balance sheet by selling its holdings of Treasuries and mortgage-backed securities. Powell said that policymakers were only now discussing how a balance sheet reduction would work, but that he expected to announce more details following the March meeting of the Federal Open Market Committee. The chair also acknowledged that the Fed’s roughly $8.9 trillion balance sheet is substantially larger than it needs to be, making substantial shrinkage necessary.
Powell also stressed that economic conditions now are much stronger than in prior cycles, particularly given the record number of open jobs. Indeed, the Commerce Department’s first estimate of economic growth in the fourth quarter showed gross domestic product rising at an annualized rate of 6.9%, well above consensus estimates of roughly 5.5%. For 2021 as a whole, the economy grew by 5.7%—its fastest pace since 1984.
Higher-frequency economic indicators indicated some slowing in January, however. IHS Markit’s composite gauge of service and manufacturing activity fell to 50.8—barely in expansion territory, and its lowest level in 18 months—indicating that the economy had largely stalled, as the rapidly spreading Omicron variant of the coronavirus restrained consumers and exacerbated supply challenges. (Readings of 50 mark the dividing line between expansion and contraction.) The University of Michigan’s gauge of consumer sentiment was revised lower to 67.2, its lowest level since November 2011, as Americans worried about inflation and falling real wages.
Portfolios have continued the wild ride that began towards the end of Q3, last year. These kinds of bumps should be expected, especially considering that the average annual “pullback” in the S&P 500 is 14%. Meanwhile, 2021 only brought a 5.2% maximum decline, and we saw just 9.8%, so far, this year. 2 Timothy 1:7 reminds us both of our proper focus and the blessings of the indwelt Holy Spirit in such times: “…for God gave us a spirit not of fear but of power and love and self-control.” A “death grip,” borne of fear during this latest ride is not the answer. As a matter of fact, as 38 Special put it, “If you cling too tightly…you’re gonna lose control.” Hold on, but loosely.
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