Last week, investors anxiously awaited the Fed policy announcement and Chairman Powell’s subsequent press conference held on Wednesday. There were no real surprises in either the policy statement or the press conference. As predicted, the Chairman announced a reduction in asset purchases at a more accelerated pace than previously thought, which is expected to start in January. He added the outlook for rates in 2022 included three rate hikes in the later stages of the year.1 After two days of declining prices, the market initially responded positively, bouncing during and immediately after the press conference. By Thursday, the market reversed course and continued to trend down, finishing the week in negative territory.
The TSX fared better than most, declining 0.75% on the week. The Dow Jones lost 1.68%, the S&P 500 lost 1.94%, the Nasdaq dropped 2.95%, the S&P 400 Mid Cap index fell 1.86%, and the Russell 2000 declined 1.71%. Technology and consumer discretionary sectors fell the most, with utilities, health care and consumer staple stocks holding up the best with slight gains on the week. The expiration of options and futures on Friday contributed to the end-of-week volatility. European equity markets fared a little better on worries of tighter restrictions to slow the spread of the virus. The pan-European STOXX Europe 600 Index ended the week down 0.35%, the German DAX Index lost 0.59%, the French CAC 40 fell 0.93%, Italy’s FTSE MIB Index declined 0.41%, and the UK FTSE 100 gave up 0.30%.
Economic data for the week reinforced speculation the Fed policymakers might take a more aggressive stance. Last Tuesday, the Bureau of Labor Statistics released the latest Producer Price Index reading for wholesale prices, showing an increase in final demand prices of 0.8% last month, which brings the year-to-date reading to 9.6%. The latest reading is the largest 12-month change in the index since November 2010. The core rate less food, energy and trade services jumped 0.7% in the month, and for the 12-months ending, advanced 6.9%. The 12-month core reading is the most significant move since the data was first collected in August 2014.2
The persistent labor and materials shortages are expected to last into 2022, easing as the pandemic fears begin to subside. Seasonal adjusted retail sales estimates for November came in at a tepid 0.3%.3 This contrasts with the 0.8% expected from a Wall Street Journal poll of economists. Adjusted for 0.8% inflation, retail sales fell 0.5% in the month. Rising costs for food, energy and housing are thought to impact purchasing decisions of the consumer.4
On a more positive note, the Empire State business activity remained strong with a reading of 31.9. New orders, shipments and unfilled orders showed increases. Labor data also showed a rise in employment and workweek. Although lower than the fall, generally, businesses are optimistic about improving business over the short term.5 The Labor Department on Thursday reported initial unemployment claims rose by 206,000, increasing 18,000 from the previous week, which was adjusted higher by 4,000 claims. Continuing claims from all programs jumped 510,808 to 2,458,419. Data for claims is often fluid around holidays as employers are more likely to hire temporary workers to meet increased consumer traffic.6
Investors’ recent focus on the Fed response to more persistent inflationary pressures and the most recent omicron virus variant has increased the volatility in equity prices. While Chairman Powell thought labor was not contributing to inflation, the tight labor market forces employers to raise wages to attract workers. This discussion can be found approximately four minutes into his press conference following the FOMC meeting last week.7
Unfortunately, the workforce participation rate is subdued, and the workforce is becoming fractured. There are five cohorts: One group are the workers who have returned to work or never stopped working; the second cohort are those workers reluctant to return to work out of fear of the Covid virus and the new more infectious variants; the third cohort are those facing vaccine mandates forcing them to be laid off or quit; the fourth cohort are those who either fear getting sick or won’t take the vaccine and can retire early, leaving the workforce altogether; the fifth is the cohort who, up until recently, enjoyed increased unemployment benefits. Until the virus is defeated, the labor market will continue to be fractured, making it difficult for the Fed to achieve one of its stated goals of full employment. The fractured labor market is likely to endure longer than anticipated, resulting in the Fed policymakers potentially falling behind the curve in their fight against inflation. The current environment is highly likely to cause equity market volatility to remain elevated well into 2022.
Sources:
2 https://www.bls.gov/news.release/ppi.nr0.htm
3 https://www.census.gov/retail/marts/www/marts_current.pdf
5 https://www.newyorkfed.org/medialibrary/media/survey/empire/empire2021/esms_2021_12.pdf?la=en
6 https://www.dol.gov/ui/data.pdf ;
7 https://www.youtube.com/watch?v=wscHrMwXTEs&ab_channel=CNBCTelevision
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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