Weekly Market Commentary

The Markets 

Stock and bond markets diverged.

Last week, the Bank of England surprised markets with a rate hike, its first in three years, and the Bank of Mexico raised rates more than expected. Both cited persistent inflation as the reason for the increases, reported Carla Mozée of Markets Insider.

In the United States, the Federal Open Market Committee (FOMC), which is the group that decides how the U.S. central bank (the Federal Reserve or Fed) will manage monetary policy, met last week and decided to become less accommodating more quickly.

With inflation at high levels and employment at full pandemic capacity, the Fed will take steps “to prevent higher inflation from becoming entrenched,” announced Fed Chair Jerome Powell. FOMC median projections suggest the Fed funds rate will rise from its current range (zero to 0.25 percent) in 2021 to 0.90 percent in 2022, and 2.1 percent by 2024.

San Francisco Federal Reserve President Mary Daly told The Wall Street Journal, “If we see that the economy is delivering high inflation, even if we expect that inflation to not persist past the pandemic, and we see the labor market is extremely tight, even though we don't expect that to be true past the pandemic, then the policy action that would be appropriate is, after tapering, to raise the interest rate,” reported Ann Saphir and Howard Schneider of Reuters.

Major U.S. stock indices declined following the FOMC meeting, reported Ben Levisohn of Barron’s. The reason for the decline is unclear since research suggests that, historically, stock markets have moved higher following rate hikes. Anne Sraders of Fortune reported:

“Analysts at Deutsche Bank identified 13 separate hiking cycles since 1955, which lasted an average of under two years. And according to their research, which examined the average price performance of the S&P 500…‘there tends to be solid growth in the first year of the hiking cycle, with an average return of +7.7% after 365 days…’”

As stock markets declined, bond markets rallied. Yields on Treasuries of many maturities finished the week lower.⁷ That was surprising because the Fed raises the Fed funds rate to push interest rates higher. However, bond investors appeared to be more concerned about the spread of the Omicron variant of COVID-19, reported Yun Li and Vicky McKeever of CNBC.  

“The world will not see a re-run of the spring of 2020, with jaw-dropping drops in [economic growth]... Even so Omicron—or, in the future, Pi, Rho or Sigma—threatens to lower growth and raise inflation. The world has just received a rude reminder that the virus’s path to becoming an endemic disease will not be smooth,” reported The Economist.

Data as of 12/17/21	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	-1.9%	23.0%	24.1%	22.0%	15.4%	14.4%
Dow Jones Global ex-U.S.	-1.0	3.4	4.0	9.7	7.0	5.2
10-year Treasury Note (Yield Only)	1.4	NA	0.9	2.9	2.5	1.8
Gold (per ounce)	1.6	-4.2	-4.4	13.3	9.7	1.2
Bloomberg Commodity Index	-0.5	23.5	25.5	6.3	2.2	-3.5

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. 

Sources: Yahoo! Finance; MarketWatch; djindexes.com; Federal Reserve Bank of St. Louis; London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

SECOND-GUESSING THE FED IS A popular AMERICAN PASTTIME. Americans have been speculating about the Federal Reserve’s monetary policy choices – raising rates, lowering rates, buying bonds, tapering bond buying, and so on – for a long time. Sometimes, they even second-guess themselves.

Paul Volcker (1979-1987) took over an economic quagmire known as The Great Inflation. When he took office, U.S. inflation was in the double digits, and the unemployment rate was 6 percent. Volcker raised the Fed funds rate from 11 percent in August 1979 to 20 percent in March 1980, reported Kimberly Amadeo of The Balance.

“Farmers protested at the Federal Reserve’s headquarters, and car dealers, who were especially affected by high interest rates, sent coffins containing the car keys of unsold vehicles. Many people also wrote letters to Volcker telling him how they had saved for many years to purchase a home but were now unable to because of high rates,” reported Bill Medley of the Federal Reserve Bank of Kansas City.

Alan Greenspan (1987-2006) was in charge through two U.S. recessions, the Asian financial crisis, and the September 11 terrorist attacks. Regardless, he oversaw the country’s longest peacetime expansion. Time Magazine’s ‘25 people to Blame for the Financial Crisis,’ reported: 

“…the super-low interest rates Greenspan brought in the early 2000s and his long-standing disdain for regulation are now held up as leading causes of the mortgage crisis. The maestro admitted in an October congressional hearing that he had ‘made a mistake in presuming’ that financial firms could regulate themselves.”

Ben Bernanke (2006-2014) became Fed Chair just before the financial crisis of 2006-2010. He was at the helm as the Fed began to stimulate economic growth through quantitative easing (buying mortgage-backed securities and long-term treasuries).

In 2012, economist Paul Krugman wrote in the New York Times, “…while the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers. The U.S. economy remains deeply depressed, with long-term unemployment in particular still disastrously high, a point Bernanke himself has recently emphasized. Yet the Fed isn’t taking strong action to rectify the situation.”

It's awfully hard to evaluate the achievements and/or failures of a Fed Chair before the economic dust settles. Usually, that’s long after they’ve left office.

Weekly Focus – Think About It 

“I have not failed. I've just found 10,000 ways that won't work.”
—Thomas A. Edison, inventor

Best regards,
JMS

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Sources:

https://markets.businessinsider.com/news/stocks/stock-market-news-nasdaq-fed-rate-hike-outlook-inflation-2021-12

https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20211215.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20211215.pdf (Table 1)

https://www.reuters.com/markets/us/fed-policymakers-make-case-rate-hikes-after-end-bond-buying-taper-2021-12-17/

https://www.barrons.com/articles/stock-market-faces-bust-boom-in-2022-thanks-to-fed-covid-51639788476?refsec=the-trader (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/12-20-21_Barrons_The%20Stock%20Market%20Could%20Be%20Headed%20for%20a%20Boom%20and%20Bust_5.pdf) 

https://fortune.com/2021/12/14/fed-rate-hike-2022-stock-market-outlook/ (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/12-20-21_Fortune_Even%20When%20the%20Fed%20Starts%20Hiking%20Rates%2c%20Stocks%20Could%20Keep%20Rising_6.pdf) 

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield

https://www.cnbc.com/2021/12/17/us-bonds-treasury-yields-inch-lower-amid-caution-over-omicron.html

https://www.economist.com/leaders/2021/12/04/what-the-omicron-variant-means-for-the-world-economy (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/12-20-21_The%20Economist_What%20the%20Omicron%20Variant%20Means%20for%20the%20World%20Economy_9.pdf) 

https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135

https://www.federalreservehistory.org/essays/anti-inflation-measures

https://www.federalreservehistory.org/people/alan-greenspan

http://content.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877331,00.html

https://www.federalreservehistory.org/people/ben-s-bernanke

https://www.nytimes.com/2012/04/29/magazine/chairman-bernanke-should-listen-to-professor-bernanke.html (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/12-20-21_New%20York%20Times%20Magazine_Earth%20to%20Ben%20Bernanke_15.pdf) 

https://www.forbes.com/sites/ekaterinawalter/2013/12/30/30-powerful-quotes-on-failure/?sh=41a29c8024bd

The material in this work is proprietary to and copyrighted by Carson Coaching and is used by JMS Capital Group Wealth Services LLC with permission.| Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. | Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.| The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.| All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.| The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index. |   The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.|  Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.|   The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. |  The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.|  The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.|  International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.|  Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.| Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.|  Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.|  Past performance does not guarantee future results. Investing involves risk, including loss of principal.|  You cannot invest directly in an index.| Stock investing involves risk including loss of principal.|  The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.|  There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.|  Asset allocation does not ensure a profit or protect against a loss.|   Consult your financial professional before making any investment decision.

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