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Markets: Thin Gruel for a Thin Market


Capital Markets Perspective brings you what to watch in the markets this week, published in partnership with Great-West Investments.

Week in Review

December 20 – 26

On Tuesday, President Biden issued his personal reassurances that with regard to the economic impact of Omicron-COVID, this time really is different: “Are we returning to March, 2020? Absolutely no. No.” Why? Because unlike when the virus first burst onto the scene, we know more about COVID than we did back then, we’re vaccinated, and the hospitals are prepared[1].

Those words from President Biden, released on Tuesday, were designed to reassure Americans that Omicron isn’t as scary or as exotic as its freaky, transformer-esque name might suggest. Moreover, the symptoms caused by recent COVID infections really do seem to be less severe than they were with other versions of the virus.[2] (I also know this from first-hand experience: four members of our fully-vaccinated household of six tested positive over the holiday week and so far <*he said, knocking on wood with obnoxious urgency*>  the symptoms have been no worse than a mild to moderate head cold.)

Still, that might seem like thin gruel for a market that until Tuesday’s Presidential pep talk was still visibly wringing its hands over Omicron. For example, as many as 2,400 flights were cancelled during what has traditionally been the peak week for US airline travel; not because of official travel restrictions (although there were a few of those as well[3],) but because illness caused by the virus left the airlines desperately short of pilots and aircrew[4]. That stands as stark evidence that Omicron-COVID can still cause economic turbulence even in the absence of official shutdowns and severe clinical presentations of the disease.

Regardless, the President’s comments seemed to strike a soothing chord: equity markets fell during six of the last eight sessions prior to Tuesday’s speech, but have risen every day since (and this is in spite of the fact that other headwinds – namely inflation, potentially moderating economic growth and a pivoting Fed – haven’t slowed at all.)

The markets’ upbeat tone last week might simply be this year’s version of a normal year-end seasonal pattern that some technical analysts believe in with the same faith that grade-schoolers place in a certain unnamed elf (the so-called Santa Claus Rally that seems to push markets higher each December with surprising regularity.) Or it could be a sincere expression of relief that the one big exogenous factor driving markets here at the end of 2021 – Omicron – might be less worrisome than markets had assumed.

For my money, it’s probably a combination of both, plus the impact of good news hitting a market thinned by holiday-week furloughs. In other words, thin gruel for a thin market.

But, as always, we shouldn’t completely ignore the goings-on of the real economy just because COVID is so easy to write about. Probably the most interesting thing to come out of last week’s somewhat compressed economic calendar were two consumer confidence reports – the Conference Board’s version on Wednesday and the University of Michigan’s on Thursday. Both were slightly above expectations as consumers seemed to tire a bit from being so worried about inflation and COVID, but commentary surrounding the releases was somewhat measured (and in one case even had kind of a “tsk-tsk” undertone to it, with one set of economists even warning that consumers will continue to feel the impacts of both rising prices and surging virus cases throughout the winter months[5].)

And for a truly fascinating read that focuses squarely on the intersection of economics and partisan politics, have a look at the UofM’s final consumer sentiment release for 2021[6]. The team there has done extensive work on how political views influence consumer sentiment and behavior, and their research seems to back up what you probably already suspected: your perceptions about how the economy and your own finances will fare over the next several months depend to a large extent on where you fall along the political spectrum. Democrat? You’re far less likely to think inflation is a long-term issue than your blow-hard, conservative uncle seated across the table from you at Christmas dinner. Republican? You’re probably feeling far less optimistic about your future earnings than your wheatgrass-eating, hybrid-driving liberal friends with whom you will share cocktails – and opinions – on New Year’s Eve. The good news? As is almost always the case, the truth probably lies somewhere in the middle: independents seemed to score almost exactly at the median on both the inflation- and future-finances question, which the authors at UofM seem to suggest means they might be seeing things with the clearest lens. Go figure.

Next up for your consideration is Thursday’s income and outlays report for November, which seemed to land right in the middle of the fairway in terms of incomes (up 0.4%,) spending (+0.6%) and inflation (+4.6% year-over-year, excluding food and energy[7].) Because it was so closely aligned with market expectations, the report failed to gain all that much attention in the press. Indeed, perhaps the only interesting thing about the release was the revelation – made obvious by comparing “nominal” growth of disposable income (that is, the figure related to the actual dollar amount we all see on our paystubs) to “real” incomes (those same numbers adjusted for inflation) – that inflation is currently eroding most, if not all, of the gains we’re seeing in our pay envelopes. While hardly surprising, the fact that “real” incomes have declined in recent months even as “nominal” incomes have risen is a stark reminder that yes, Virginia, there is inflation, and it ‘ain’t Santa Claus’ friend (…sorry, had to slip in one final holiday movie reference before we fade-to-black on 2021.)

Finally, as has become our habit, let’s close the discussion of last week’s happenings with one or two policy-related tidbits. Barring something truly surprising, it looks like 2021 will end without any of the policy drama that threatened to upend markets earlier this month. But that doesn’t mean it’s over: last week, Democratic breakaway Joe Manchin – who, together with fellow Democrat and Senate colleague/anti-partisan rogue Kyrstin Sinema has positioned himself as kingmaker, at least as far as President Biden’s big infrastructure and social spending bill is concerned – reminded everyone that he can’t support Joe’s Big Bill in its current form. That sets up January as the timeframe for Washington’s next Battle Royale, as Senate Majority Chuck Schumer promised to bring the bill forward for consideration in early January[8].

So at least there’s that to look forward to in 2022.

What to Watch This Week

December 27– January 2

Notable economic events (December 27- 31)

Monday: Dallas Fed

Tuesday: Richmond Fed, home prices (x2)

Wednesday: Pending home sales

Thursday: Weekly jobless claims, Chicago PMI

Friday: Early market close (US)

The week between Christmas and New Year’s always seems to be kind of a throwaway, and this year is no exception. Although it’s possible that we could get news regarding Omincron-COVID that moves markets, or perhaps President Biden could announce his candidates for one or more of the three open spots on the Fed’s Board of Governors, but aside from that there is very little in the way of meaningful data expected.

Probably the most significant data on the calendar will be a series of PMI-type data, beginning with the Dallas Fed manufacturing index on Monday, the Richmond Fed on Tuesday and the Chicago PMI on Thursday. As always, PMI data (which, by the way, stands for “Purchasing Managers Indices” and is sometimes stretched to include the Federal Reserve’s regional manufacturing reports like Dallas and Richmond this week,) can provide insight into how businesses are planning for coming months and is therefore valuable as a forward-looking view into economic trends. While PMIs seem likely to tip over at some point in 2022, expect this week’s data to say pretty much the same things as other, similar reports in recent months: demand is strong, but production is still being constrained by high prices, the lack of labor and other such ills.

There will also be a few housing-related datapoints for markets to chew on, including home price data from S&P/Case-Shiller and the FHFA, both expected Tuesday, as well as pending home sales data on Friday. Last week’s housing data seemed to confirm that the US housing market is fine, but still stuck in something of a lull after a torrid recovery on the heels of the first COVID shut-downs, partially because inventory stress has kept prices climbing even as transaction volumes slowed from the nuttiness witnessed late last year and early this. This week’s data will probably carry the same messages.

In closing, let me offer a quick thanks for letting me bend your ears about markets and the economy this year. Writing these commentaries is something I truly enjoy and am passionate about, and I hope you find it interesting and useful. If not, the turn of the calendar always provides a perfect opportunity to direct change, so please feel free to lob a few spears and arrows my way if you have any suggestions on how to make this better.

Arrows or not, I hope 2022 brings happiness, hope and prosperity to you and yours. It seems easy to forget sometimes, especially with all the headlines we try so hard to dissect in these pages, but we are all truly blessed to be living when and where we are – let’s let the turning of the calendar on Saturday morning be a reminder of that to us all.

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Personal Capital Advisors Corporation (“PCAC”) is a wholly owned subsidiary of Personal Capital Corporation (“PCC”), an Empower company. PCC and Empower Holdings, LLC are wholly owned subsidiaries of Great-West Lifeco Inc. Source for index data: Bloomberg.com; GWI calculations.


[1] https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/12/21/remarks-by-president-biden-on-the-fight-against-covid-19/

[2] https://www.reuters.com/world/africa/safrica-study-suggests-lower-risk-hospitalisation-with-omicron-versus-delta-2021-12-22/

[3] https://corona.health.gov.il/en/country-status?countryStatusId=4&page=11.

[4] Bloomberg, 12/26/21; fightaware.com

[5] https://www.conference-board.org/topics/consumer-confidence

[6] http://www.sca.isr.umich.edu/

[7] https://www.bea.gov/news/2021/personal-income-and-outlays-november-2021

[8] https://www.politico.com/f/?id=0000017d-d794-d3d7-a37d-df9efdef0000.

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