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MARKET RECAP

• S&P was down by 0.3%, the Dow by 0.9%. International stocks were up by 1.32%.
• December inflation came in a 7% year over year, the highest rate in 40-years.
• Market is anticipating rate hikes, but still thinks they top out at around 1.6% in about 2024 while the 10-year is projected to be at about 2% in two years. That sounds low to us.
• Meanwhile the Fed is still buying 60 billion in securities per month.
• Fed speakers are confirming three one-quarter rate increases but markets are beginning to price in a 4th hike in December.
• The Nasdaq is down about 5% year-to-date while deep value stocks are up. The Invesco S&P 500 Pure Value fund is up 7% while the Pure Growth fund is down 7%.
• The Barron’s Roundtable, normally an optimistic bunch, is looking for inflation to continue and stocks to fall in the first half of the year, followed by the possibility of a more stable market and positive returns in the second half.
• Retail sales fell by 1.9% in December.
• Companies are trying to take advantage of low interest rates before they begin to go higher, $100 billion was raised by investment grade companies in the first nine  business days of the year.
• The Real GDP growth estimate for Q4, which in November was as high as 9%, has now fallen to 5%, showing the impact of Omicron as the year closed-out.

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MARKET RECAP

For the opening week of the year US equities fell by 2.21% while international stocks were roughly flat, down by 0.08%. Bonds fell by 1.39% as interest rates increased. The 10-year yield closed the week at 1.76%, up by 24 basis points.

The higher interest rates, and the sell-off in stocks and bonds were mainly due to the release of the December minutes from the Fed indicating the chance that the Fed might begin to reduce its balance sheet sooner than expected, that is on top of the 3-4 interest rate increases that are now expected in 2022.

Non-farm payrolls came in at 199,000, much less than the anticipated 424,000 increase. But still, the overall report continues to indicate a very tight labor market. Unemployment fell to 3.9% from 4.2% last month, below the FOMC estimate of the the long-run equilibrium rate. Wage growth is now running at between 7 and 8% annualized.

Former Treasury Secretary Lawrence Summers said on Bloomberg’s Wall Street Week that “the level of heat we have in the labor market is consistent not only with high inflation but with accelerating inflation.” The Fed might have to cool the economy to get inflation under control.

Higher interest rates helped energy and financials, but hurt technology and the other high-fliers. Bitcoin is down by about 38% since its November high. The Nasdaq 100 is sitting right on support. This will be the third test at this level in recent weeks.

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MARKET RECAP

Fittingly, stocks ended the final week of the year on an up note, with US stocks advancing by 0.67% and international markets by 0.52%. The US markets closed the year just under the Monday high for the year.

For the year, the overall US market was up by 25.67% (dividends included), the Dow by 20.84%, international stocks by 9.00%, the US dollar by 4.2%, oil by 55.01%, and bitcoin by 62.70%. Bonds dropped by 1.77% for 2022.

The labor market remains super hot. There are lots of jobs out there and not enough people to fill them. Initial jobless claims came in this week at 198,000. That is very close to the lows dating back to 1969, and of course, the economy and the country is much bigger now, so proportionally, these are all time lows.

Holiday sales were up by 8.5%, although when you back out inflation of 6.8%, the real increase would be about 1.7%. The Omicron variant is hurting the economy, thousands of flights have been canceled in the last week, and it seems like the virus is literally everywhere. If you don’t have it or if someone in your family doesn’t have it, then a friend or neighbor does, lots of them. The speed with which Omicron is spreading might indicate that it will be peak much quicker than previous variants. Despite the fast moving virus, economists are expecting minimal intermediate or long-term disruption to economic growth.

Meanwhile, valuations are still stretched based on traditional metrics. Looking at the price/earnings ratio (see below), the current forward p/e is estimated at 21.37 versus an average since 2004 of 16.50. An offset to that is interest rates remain incredibly low, as an example, the 10-year yield is currently 1.52% versus a 2.77% average (since 2004).

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MARKET RECAP

• The S&P fell by 1.9% making that three weekly losses in the last four.
• Two market leaders, MSFT and AAPL, that have been holding up the market, fell by 5.5% and 4.6% last week.
• The Fed is signaling three interest-rate increases next year and tapering is now set to finish in March instead of June.
• The Omicron variant is spreading like wildfire. The variant does not appear to be as severe but it is much more contagious. Third doses of Moderna or the Pfizer vaccine seem to offer some protection from severe cases. New York hit a record number of cases on Friday. Covid hospitalizations are up 45% over the last month.
• The average stock is 28% off its high.
• The five-year breakeven inflation rate is now 2.65%, that is down from 3.17% last month.

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MARKET RECAP

While the overall US stock market is still a little bit off its highs, the S&P 500 managed to close at an all-time high on Friday, helped by Apple, which was up by 2.8% on Friday, 10.88% for the week, 21.32% for the month and 36.07% year-to-date. Apple is now selling at 32x earnings, as recently as January of 2019 it was on sale at 12.5x earnings and in 2016 at 10x earnings. For the week, US stocks increased by 3.61% and international by 2.55%.

The market rallied this week as the Omicron variant does not appear as dangerous as initially feared, and as investors don’t seem worried about the long-term risk of inflation, with the 10-year treasury rate at 1.49%. That doesn’t appear to make sense, as the latest CPI report shows prices rising by 6.8% over the last 12-months. The biggest increase in 39 years. The general consensus is that inflation will drop to the 2.5 to 3% range by the end of next year. Five-year TIPS currently imply an inflation rate of 2.8%.

The market is pricing in three 1/4% increases in interest rates in 2022, in June, September and December.

MARKET RECAP

MARKET RECAP

US stocks fell by 2.03% while international stocks were basically flat, off by 0.13%.US equities are now off by 4.77% from the November 8th high. The damage has been more extensive in small caps, the IWM is off by 11.55%. A lot of highflyers have been taking a big hit. Square is off by 37%, Paypal 40%,  Docusign 56%, and Draftkings 60%. These are just some random samples. Blame the Omicron variant or an acceleration of the tapering, or both, either way, stocks and other risk assets have been selling off.

Bitcoin was down by as much as 35% on Saturday. The SPY, IWM, and bitcoin all hit their closing highs on November 8th. It looks more and more that the argument that bitcoin is a non-correlated asset with equities is nonsense.

Nonfarm payrolls were up by 210,000 in November, the lowest monthly growth of the year and off of projections of about 500,000. However, the report did have some good news. The household survey indicates that payrolls actually rose by 1.1 million, indicating that huge numbers are moving to self-employment. The unemployment rate fell to 4.2%, just above the Fed’s estimate of the natural rate of unemployment. 600,000 people returned to the workforce, increasing the labor-force participation rate to 61.8%, a new post-pandemic high. Average hourly earnings were up by 4.8% year-over-year. All of this indicates a tight labor market and will give the Fed the go ahead to speed up its bond-buying program and accelerate interest rate increases in 2022.

The overall economy is strong. GDPNow is forecasting 9.7% growth in Q4.

Long rates are falling while short-term rates are rising, meaning the yield curve has been flattening. The short-end is pricing in interest rate increases in 2022, while the long end is lower anticipating lower long-term inflation or slower growth or both.

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MARKET RECAP

MARKET RECAP

Stocks were off slightly, down by 0.25% in the US. Outside the US, equities increased by 0.24%. Stocks sold off on Wednesday on the inflation news (see below) and on a weak 30-year treasury auction but recovered most of the loss on Thursday and Friday.

Inflation was up by 6.2% in October, that was the biggest one-year increase since 1990 and the fifth month in a row that inflation broke 5%. For the month, prices were up by 0.9%. Home prices were up by 16% in the third quarter compared to one year ago.

The Fed has been buying $120 billion in bonds each month, they have announced they will cut that amount by $15 billion a month. That means it will take eight months to put an end to the bond buying. And in the meantime, the Fed will be adding another $420 billion to its balance sheet. This, while inflation continues to accelerate. The Fed seems to be way behind the curve on this.

MARKET RECAP

MARKET RECAP

US stocks were up by 2.3% and international equities by 1.23%. As expected, the Fed said it would begin its unwind of its bond buying program but said interest rates would remain the same. Covid numbers continue to improve and to top it off, Pfizer announced it has developed an anti-viral that was 89% effective, topping the recent drug that Merck is bring to market (50%).

The October jobs report was excellent. The economy added 531,000 jobs, the biggest gain in three months. August and September numbers were revised up by 235,000. The current economy trails the pre-Covid total job number by 4.2 million. The unemployment rate fell to 4.6% from 4.8% and the participation rate remained steady at 61.6%. On the negative side, US worker productivity fell at an annualized rate of 5%, the largest quarterly decrease since 1981.

Jack Hough’s column in this week’s Barron’s is titled “Weird Finance”, and talks about NFTs, cryptos and more of the craziness that zero percent interest rates and money everywhere has unleashed. Somewhere down the line, if people ask “what were they thinking?”, this article might be a good place to start.

Tesla’s market cap increased by over $300 billion during the last week of October. On Tuesday, Avis went up in price, at its high, by 217% on Tuesday, but would close 35% off that number. Two examples of some of the mania in this market.

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