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Market Update: December 2021

As the fourth quarter heads toward a close, markets remain choppy, with large swings across major indices fairly commonplace as investors digest new information on the economy, fiscal policy, and Central Banks. In particular, the focus over the past couple of weeks is the Federal Reserve, which adopted a much more hawkish tilt at their last meeting by accelerating the “taper” of their bond-buying program and raising expectations for rate hikes in the years ahead. This was due to the rapid rise in inflation over the past six months, particularly in food, energy, and housing prices (rent chart below for context). It’s unclear whether Fed policy will have a notable impact on inflation, however, as industry surveys continue to point to elevated import and logistics costs as a source of inflation, along with rising labor costs due to structural inefficiencies between the supply and demand of labor within certain industries.

 

While the Fed has pledged to reduce the amount of liquidity they have been providing to the economy over the past couple of years, current conditions remain fairly accommodative, which is one reason why the past several market corrections have been fairly shallow. This is particularly true in large-cap stocks, and indices such as the S&P 500 and the Nasdaq, but less so among emerging market indices, and small caps. Emerging markets, in particular, have struggled this quarter, due in part to a strong U.S. dollar, and continued softness in more export-oriented Asian economies.

 

Commodities over the period have also been mixed, with oil prices briefly touching the low $80’s in late October, before falling roughly 10% on economic growth worries caused by the Omicron variant, and the aforementioned tighter Fed policy. More recently, uncertainty over the legislative path for the Biden Administration’s Build Back Better plan has also subtracted from growth forecasts, but in our view, it’s still too early to call the outcome of that policy.

 

With respect to the Fixed Income, the treasury curve continues to flatten, as more policy-sensitive parts of the curve, such as the 2-year yield, rise, while longer dated yields decline on lower growth and inflation expectations in the future. Although the 10-year yield at one point touched 1.7% back in late October, it has since fallen to roughly 1.46%, which is the same level it was at back in late September.

 

In our view, the choppiness of the recent environment reaffirms our guidance that investors should stay focused on the longer-term during periods of uncertainty, while staying properly diversified across asset classes, with a tilt towards quality across both equity and fixed-income allocations.

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