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January Economic Update

Market Summary

The stock market started December on an uncertain note on with news of the Omicron variant, but then managed to rally in the latter half of the month to end the year on a high note. The Dow Jones added 5.38% for the month, while the S&P 500 gained 4.36% and the Nasdaq lagging a bit, climbing 0.69%. Those trends have continued into the first trading week of the year where we have seen some relative weakness in technology stocks, while industrial and value stocks have fared better to start the new year. (1)

Omicron Variant

December both began and ended with uncertainty regarding the impact of the new Omicron variant. As the month progressed, more and more data confirmed that the variant was less severe than previous strains, yet also far more contagious. Mid-month, the markets reacted positively to data which showed the variant was less severe than previous strains, but uncertainty began to increase as we headed into January. While the chances of hospitalization and death appear to be far lower with Omicron, the sheer volume of cases has never been higher which is placing strain on both hospitals and domestic economic activity.

Many experts are predicting that this latest Omicron wave will end as suddenly as it began, which cases dropping precipitously as we near the end of the month, which gives hope that the economic impact from the variant will be brief.

Interest Rates & Tapering Bond Purchases

Since the spring of 2020, the Fed has supported the bond market by purchasing billions of dollars of mortgage-back securities, corporate bonds, and U.S. Treasuries. Towards the end of 2021, those bond purchases began to taper, with the Fed purchasing fewer securities each month.

At its mid-December meeting, the Federal Reserve stated they would accelerate their tapering of bond purchases from $15 billion a month, to $30 billion a month. On January 5th, the Fed released statements regarding this process, as well as an outlook for potential interest rate increases this year. The acceleration in tapering implied that asset purchases would likely end by March. (2)

The actions the Fed plans to take is in direct response to the elevated levels of inflation we have experienced over that last several months which have been far higher than originally anticipated. Whil