Fed Delivers 'Bah, Humbug' Message Before The Holidays

Weekly Market Recap Report

The Fed announced last week that Tapering of bond purchases would proceed at a faster pace ($30 bil per month) than originally advertised and would end sooner (March of 2022). Markets initially cheered the news on Wednesday by rallying 2%. However, after investors had time to digest the rest of the news, markets proceeded lower by the end of the week. The Fed revised their interest rate outlook to 3 hikes in 2022 instead of 1.

In addition, the Fed revised inflation expectations higher and unemployment lower. The outlook for GDP in 2022 remains at 4.0%, according to the Fed, but that number seems troublesome with with rising inflation and rising interest rates. The market seems puzzled and perhaps the fears are that the Fed has moved too slow in adjusting to rising inflation.

The economic data was mixed last week. Retail Sales for November disappointed, but we expect December’s number to be better as sales the 1st three weeks of this month have looked strong. Housing data came in better than expected last week and industrial / manufacturing data was mixed.

The consumer-related data released this week will be closely watched. Personal Spending and Consumer Sentiment are expected to edge lower. The Redbook data shows consumers are spending more on a year-over-year basis this December. However, if consumer sentiment continues to slip, that doesn't bode well for a potential January effect at the beginning of 2022.

Over the weekend, Democratic Senator Joe Manchin delivered a message of a resounding "no" on the Build Back Better bill that the Biden administration has been trying to get pushed through over the past several weeks. This situation presents challenges and silver linings. First, the silver linings - no additions to national debt, no corporate taxes (potential for higher corporate earnings), and no piling onto already rising inflation. However, with the end of the bill (for now), comes the revision of growth in 2022. Several economists and investment firms had built the bill into their spending estimates, which paved the potential for higher growth in 2022. Those estimate are now being revised lower. If the Fed is hiking interest rates and inflation continues moving higher, the lack of government spending could set up the consumer to begin paring back on purchases.

In addition to potential Fed policy error, the headwinds for 2022 are beginning to pile up. Inflation and Interest Rates pose a risk in 2022.

Continued issues in shipping have yet to resolve themselves. There is a considerable lack of available jobs being filled, especially in the Transportation and Warehousing sectors.

We will seek to flush out these headwinds in more detail in our 2022 Outlook that we'll release within the coming weeks.

May you have a blessed holiday season!