Santa’s Thunder | December 17, 2021

AUTHOR: Jason J. Roque, MS, CFP®, APMA®, AWMA®
TITLE:       Investment Adviser Rep – CCO
TAGS:   S&P 500, FRB, CPI, Rates, Sentiment

The S&P 500 shed 1.94% on the week as Omicron took center stage. Will Omicron steal Santa’s Thunder?


Markets opened the week in the red. This came as the first true negative news broke on Omicron over the weekend. There are now studies showing that second dose treatments of MRNA vaccines are not very effective on Omicron. Additionally, the UK announced their first fatality of an Omicron infected individual.


Inflation, inflation, inflation… Omicron, omicron, omicron… Markets dove on Tuesday as the Producer Price Index rose more than expected. The fear being that companies will have to pass those price increases through to consumers or realize weaker profits. Either scenario is bad. Omicron continues to make noise as its high transmission rate is leading to spikes in cases.


Market movement early was very minimal. Most investors seemed to be awaiting the results of the FRB meeting. The FRB did not disappoint. They will accelerate their taper program from $15B/month to $30B. They also signaled the potential for as many as 3 hikes in 2022. This data should prompt a negative market response, however, the markets climbed in response. The S&P 500 ended up adding 1.63% on the day. So why the gain? Investors likely view the increased action from the FRB as being in line with market expectations given current conditions. By accelerating their process, they avoid a potential misstep of being too dovish and letting inflation run away from them.


Re-opening stocks did well on the day, but the markets as a whole fell back from the surge on Wednesday. The Nasdaq lagged the S&P 500, which is logical since it has been leading on the up days as well. The S&P 500 ended up losing 0.88% on the day. The Nasdaq dropped 2.47%. The moves on the market seem to be the long response to the FRB move yesterday. The actions of the FRB would lead towards leaner demand and softer profits on the year.


Markets tumbled on Friday while there was no major economic data on the day. The void left by economic data pushed the focus to headlines surrounding Omicron. The S&P 500 ended up falling 1.07% to close out Friday. The week saw the S&P 500 tumble 1.94%!


One of the fears of an overly aggressive FRB is taking action before the job market can fully mature. Participation is an important factor to the term “full” employment. In 2007, participation in the labor market was running at 66% of the population. After the 2007     recession, the rate continuously fell until 2013. The workforce contraction had much to do with the boomer generation retiring. From 2013 to 2020, the participation rate held steady at 63%. This was a combination of boomers holding off retirement and an influx of the millennial generation into the work force. During the pandemic, the rate fell to 60.8% and has since bounced back to 61.8%. So, the big question is, “Where is that other 1.2%?” If we start attacking inflation before they comeback, will we stem job growth and prevent full employment? No. They are not coming back. With every recession, you’ll find workers who decide that retirement chose them rather than the other way around. As a result, there is very little fear that the FRB’s actions are moving too quick, but rather too slow.

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