Market Monitor: December Update

Headlines and Highlights
  • Stocks cap strong 2021 with late-year surge: The stock market powered through the latest challenges from inflation, the Omicron variant of COVID-19 and the Federal Reserve’s plans for coming rate hikes to finish the year near record highs. Real estate investment trusts wrapped up a banner year with a 2021 return of 40.4% while the large-cap benchmark also had a strong December performance to finish up 28.8%, aided by a late boost from a “Santa Claus rally.” International developed stocks had their best monthly gain (4.2%) of the year to finish 2021 in double digits (11.2%). Taxable bonds ended a rare down year (-1.9%) with another slight decline.
  • Omicron’s spread to crimp near-term growth: Widespread outbreaks of Omicron prompted business closures, flight cancellations and event shutdowns, cutting into first-quarter U.S. growth estimates. Following fourth-quarter growth pegged by the Atlanta Fed at 7.4%, economists have reduced forecasts for the first quarter to the low single digits. Growth in subsequent quarters is expected to offset the short-term damage if Omicron’s hospitalization and death rates continue to remain comparatively low.
  • Workers still quitting their jobs at a record pace: A record 4.5 million Americans voluntarily left their jobs in November, the latest month for which data are available, while job openings also remained near a record level at 10.6 million. The latest evidence of a tight labor market keeps the pressure on employers to offer higher pay to attract workers, a factor which has pushed wages meaningfully higher in recent months and contributed to elevated inflation.
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Sources: Morningstar, Altair Advisers

Our Views
  • The coronavirus pandemic remains the single biggest factor in determining how the global economy will fare in 2022. Recent evidence suggesting that it is becoming less deadly even as Omicron cases surge, with less hospitalization and milder cases, ultimately bodes well for continued recovery.
  • Inflation is likely to remain above normal in the coming months as supply-chain delays persist and employers pay more to lure workers off the sidelines. The inflation rate likely has peaked, however, and should gradually decline by the second half of the year as supply bottlenecks are resolved.
  • The Federal Reserve is likely to begin increasing interest rates modestly as soon as this spring in an effort to rein in inflation. Unless new problems emerge to drive the inflation rate still higher, the Fed is unlikely to raise the current near-zero rate by more than 1 percent in 2022.
  • U.S. stocks are well-positioned for another positive year, bolstered by strong corporate earnings, strengthened household cash reserves and a robust economy. With the removal of government stimulus and the Fed poised to raise rates, gains will likely be more modest than in 2021. We also are constructive on developed international stocks with the overseas recovery likely to follow the U.S. economy’s lead, although China’s slowing economy and potential lockdowns because of its zero-Covid policy will continue to pressure many emerging markets.
  • Bonds continue to serve an important role in a diversified portfolio even with lower return expectations in a rising rate environment. The yield on the benchmark 10-year Treasury note has risen off its historically low level, causing bond prices to decline, but we do not anticipate a dramatic further increase in 2022.

The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice