Economic Update 12-27-2021

• Economic data during the holiday week included a slight revision upward for Q3 U.S. GDP, and a slight improvement in consumer confidence. Durable goods orders and housing metrics were mixed.

• Global equity markets gained broadly last week, as fear of the Covid omicron variant’s severity seemed to subside a bit. Bonds were mixed to lower along with higher interest rates. Commodities also fared well, particularly in oil and metals, where the demand outlook was again viewed more positively.

In the U.S., every sector ended in the positive, led by consumer discretionary and technology, up 3-4%, while defensive sectors consumer staples and utilities registered gains under a percent. Real estate gained meagerly as well, held back likely by rising interest rates.

The week began negatively, following a surge of global restrictions imposed in the face of the Covid omicron variant the prior weekend. The news also included digesting the rejection of the Build Back Better Plan by WV Sen. Manchin, which would result in lower spending in the near term. By later in the low volume holiday week, eased fears about the omicron variant propelled sentiment higher, with ongoing medical reports about its lesser degree of severity compared to earlier variants, as well as reports that vaccine boosters by some manufacturers showed continued effectiveness, and FDA approval of several Covid antiviral medications. During a press conference, Pres. Biden’s vow for no further lockdowns reassured investors as well.

What is the potential economic impact of no Build Back Better bill (or a tweaked watered-down version)? The effects are mixed. On one hand, government transfer payments and enhanced benefits to consumers tend to raise spending (particularly seen via an expanded child tax credit)—so lower payouts equate to lower potential economic growth as this spending percolates up to corporate earnings. (Some estimates call for a reduction of Q1-2022 GDP from 3% to 2%, roughly, with lesser effects in subsequent quarters, implying the spending benefits are shorter-term.) At the same time, the bill’s cost required higher taxes, which can weigh on corporate net earnings to the negative. Sen. Manchin’s primary concerns were about the high social spending costs, which are difficult to pare back once implemented.

Foreign stocks gained, along with positive sentiment for equities generally, and boosted by a falling dollar. Europe and the U.K. outperformed U.S. stocks, while Japan and emerging markets lagged with lesser positive returns. While reports of omicron’s lesser severity helped markets abroad as well, Europe has undergone stronger lockdown restrictions, notably in the Netherlands, with travel restrictions in several other countries—all of which are likely to weigh on near-term economic growth, which is already challenged there. In light of these uncertainties, he ECB announced tapering of its emergency asset-buying program, while temporarily increasing other programs. In China, a key interest rate was cut, in keeping with hopes to avoid negative economic ramifications from negativity in property markets.

U.S. bonds were mixed in investment-grade, while high yield and floating rate bank loans gained along with positive sentiment for risk assets and rising interest rates. A weaker dollar last week didn’t help developed market debt, but pushed local currency emerging market bonds up sharply.

Commodities regained ground last week with every sector in the positive, led by energy and industrial metals. The price of crude oil rose by over 4% to just under $74/barrel. In a reversal of recent weeks, reduced fears of the Covid omicron variant have caused demand expectations to again rebound higher.

Period ending 12/24/2021	1 Week (%)	YTD (%)
DJIA	1.65	19.65
S&P 500	2.30	27.59
NASDAQ	3.20	22.24
Russell 2000	3.12	14.58
MSCI-EAFE	1.58	10.21
MSCI-EM	0.31	-3.62
BBgBarc U.S. Aggregate	-0.37	-1.70

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2020	0.09	0.13	0.36	0.93	1.65
12/17/2021	0.05	0.66	1.18	1.41	1.82
12/24/2021	0.07	0.71	1.25	1.50	1.91

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

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