January Economic Update

Market Summary

The stock market started December on an uncertain note on with news of the Omicron variant, but then managed to rally in the latter half of the month to end the year on a high note. The Dow Jones added 5.38% for the month, while the S&P 500 gained 4.36% and the Nasdaq lagging a bit, climbing 0.69%. Those trends have continued into the first trading week of the year where we have seen some relative weakness in technology stocks, while industrial and value stocks have fared better to start the new year. (1)

Omicron Variant

December both began and ended with uncertainty regarding the impact of the new Omicron variant. As the month progressed, more and more data confirmed that the variant was less severe than previous strains, yet also far more contagious. Mid-month, the markets reacted positively to data which showed the variant was less severe than previous strains, but uncertainty began to increase as we headed into January. While the chances of hospitalization and death appear to be far lower with Omicron, the sheer volume of cases has never been higher which is placing strain on both hospitals and domestic economic activity.

Many experts are predicting that this latest Omicron wave will end as suddenly as it began, which cases dropping precipitously as we near the end of the month, which gives hope that the economic impact from the variant will be brief.

Interest Rates & Tapering Bond Purchases

Since the spring of 2020, the Fed has supported the bond market by purchasing billions of dollars of mortgage-back securities, corporate bonds, and U.S. Treasuries. Towards the end of 2021, those bond purchases began to taper, with the Fed purchasing fewer securities each month.

At its mid-December meeting, the Federal Reserve stated they would accelerate their tapering of bond purchases from $15 billion a month, to $30 billion a month. On January 5th, the Fed released statements regarding this process, as well as an outlook for potential interest rate increases this year. The acceleration in tapering implied that asset purchases would likely end by March. (2)

The actions the Fed plans to take is in direct response to the elevated levels of inflation we have experienced over that last several months which have been far higher than originally anticipated. While tapering bond purchases and raising interest rates may help to combat inflation, these moves also risk slowing domestic economic progress while also posing a threat to growth stocks such as technology companies.

What to Expect in January?

The beginning of this year might be a choppy as we ebb and flow through January. The markets will be listening for updates from the Federal Reserve, inflation data will be closely monitored, and all eyes will remain on the bond market which is pricing-in at least three interest rate increases in 2022.

The progression of the Omicron variant will be monitored, as we all hope this latest wave ends as quickly as possible. Quarterly earnings reports will begin to be released toward the end of this month, with expectations for increased profits remaining high, although some uncertainty remains regarding forward guidance into the latter part of the year.

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Monthly Financial Tip:

If you’re financing a new car, look for the best interest rate before setting foot in the dealership. It could be to your advantage to take a cash rebate and get a loan elsewhere.

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Citations:

1. WSJ.com, December 31, 2021

2. WSJ.com, December 15, 2021

Disclaimers:

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.