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December Economic Update

Market Summary

Last month, the stock market rallied for the first part of the month, only to have those gains taken back. The market stumbled late in the month due to reports of the Omicron variant as well as the Federal Reserve stating inflation can no longer be considered as “transitory” and interest rate increases will be warranted sooner than expected. The Dow Jones took the hardest hit, dropping 3.73% in November with the S&P 500 falling 0.83%. The Nasdaq Composite managed to post a small gain of 0.25%. (1)

Thanksgiving Surprise

The markets were blindsided by news over Thanksgiving Day of the emergence of a new COVID-19 variant in South Africa, which led to travel bans by multiple countries and renewed unease about the prospect of a return to economic and social restrictions. The potential global spread of Omicron triggered fears of another round of economic deceleration. While little is known about the variant at this time, preliminary indications are signaling Omicron is likely more contagious than the Delta variant but could possibly present milder symptoms, which would be positive news if proven correct. More data will be released in the coming weeks as to the efficacy of the vaccines for this new variant.

The Federal Reserve’s Inflation Reversal

Somewhat lost in the Omicron headlines was the Federal Reserve’s pivot on their views of whether the high inflation rates we have seen in 2021 are temporary. During Fed Chair Jerome Powell’s testimony to congress on November 30th when asked whether inflation is still transitory, he stated it’s “probably a good time to retire that word.” This was a stark shift in the Fed’s stance on inflation expectations. For more than six months, the word ‘transitory’ has been used repeatedly by Powell to characterize inflation expectations. This concession has signaled a stark shift in monetary policy moving into next year. (2)

While many believe that we are close to peak inflation and the rate of change will likely subside as we move into 2022, the Fed believes we will likely not see the CPI back to recent historical norms of 2% until late next year or early 2023. Due to this probability, the Powell stated they may be forced to taper bond purchases and raise interest rates sooner than anticipated. After these statements were made, the markets reacted quickly with the S&P 500 closing lower for the week.

Looking Forward to 2022...

By the end of the trading session on December 3rd, the major stock indices had pulled back from their all-time highs. The resiliency of the stock market will be one of the hallmarks o