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Edition 34: The Fed Takes the Reins

The Fed Takes the Reins
Signal Strength: Strong. Equity markets and some higher-risk bond sectors finished out the year with strong returns, while higher quality bonds struggled and ended the year in negative territory.

December Market Recap

The S&P 500 Index returned 4.36%

The Bloomberg Barclays U.S. Aggregate Bond Index returned -0.29%

Fed Funds Target Range: 0 – 0.25%

Economic Review

In early January, the Bureau of Labor Statistics reported total non-farm payroll employment rose by 199,000 in December. Economists polled by the Wall Street Journal had forecast 422,000 jobs would be created.

The jobs data is derived from businesses reporting by industry. Job growth averaged 537,000 per month in 2021. Nonfarm employment is still down 2.3% from its pre-pandemic level in February 2020. Leisure and hospitality, the sector that is still the most impacted by the ongoing pandemic, showed an increase last month, after lagging in November.

The household survey looks at employment by demographics and provides more granular information. The unemployment rate declined by 0.3 percentage point to 3.9% in December, and the number of jobless decreased to 6.3 million. In February 2020 the unemployment rate was 3.5%, and jobless numbered 5.7 million. Over the last year, average hourly earnings have increased by 4.7 percent.

The December employment number makes it more likely that the Fed will remain on the accelerated tapering reduction program announced at the December FOMC meeting. Tapering was projected to end in June and will now end in March, with bond purchases reduced by $30 billion per month, double the initial rate of tapering. The Fed is now signaling three rate increases in 2022, three in 2023, and two in 2024. This is likely to put the short-term rate at just over 2% by the end of 2024.

Businesses are maintaining a constructive outlook. The Institute for Supply Management (ISM) Survey shows positive expectations. ISM reports that 65% of respondents expect higher revenue. Purchasing executives forecast a 6.5% net increase in sales for 2022, compared with a 14.1% increase expected in 2021.

Market Review

The S&P 500 saw 434 issues gain for the year, with 96 gaining over 50%. All 11 sectors posted double- digit gains. The index posted 70 new closing highs for the year, ranking second only to 1995 with 77. For the month, 10 of the 11 sectors gained, up from two last month. Consumer Staples was the strongest performer in December, and Consumer Discretionary was the only sector that declined. Volatility for the year was lower than 2020 (not hard to do) but still much higher than pre-pandemic comparisons.

The 10-year U.S. Treasury ended the month at 1.51%, not even close to the projection of 2% by year-end that we saw last January. The Bloomberg U.S. Aggregate Index was down, returning -0.29%, and finished the year in the red with a return of -1.54%. As represented by the Bloomberg Municipal Bond Index, Municipal bonds returned 0.16% for a year-to-date return of 1.51%. In December, the return to risk assets benefited the Bloomberg U.S. High Yield Index, which turned in 1.87% for the month, bumping the year-to-date return to 5.27%.

Private debt funds that closed in the third quarter of last year raised a total of $41 billion, according to Preqin’s most recent report. There are now 691 private debt funds in the market, targeting an aggregate $291 billion. The internal rate of return for direct lending funds’ one-year horizon was 12.7% to March 2021.


Chart of the Month

GDP growth is likely to moderate in 2022 before regaining momentum.

GDP Growth Projections World Bank

By The Numbers: A Directional Snapshot

  • Banks are loosening standards as they grow more confident in the economy and growing household wealth. More credit cards were issued to people with lower credit scores last year.
  • Futures markets are pricing in 70% odds of a March rate increase, up from 36% in early December.
  • Dreams reflect how we see the world – and people whose formative TV experiences were not in color carry that over. While it’s declining as boomers age, 12% of people dream in black-and-white.

WSJ; CME; New York Times

Read Enough? Check Out What We’re Listening To

  • What Does Web3, Crypto, and DeFi Mean for the Wealth Management Space? The Advisor Lab sat down with Adam Blumberg, co-founder at Interaxis, an education platform for financial advisors on all things Web3, DeFi, and Crypto. This is a marathon of an episode - Adam shares the full background on the space, what to know about it, and how Advisors can prepare for the year ahead.


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