Weekly Update 12/20/2021

Your Weekly Update for Monday, December 20, 2021.

Beacon Rock Wealth Advisors is a financial planning and registered investment advisory firm in Camas, Washington. We are always available to answer your finance questions. Give us a call at (800) 562-7096 or send an email to [email protected].

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Have a great week!

Mike Elerath
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Bill Roller
NMLS #107972
[email protected]

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Markets dropped last week. The Dow Jones Industrial Average fell 1.68% to 35,365.44 while the S&P500 ended down 1.94% to 4,620.64. The Nasdaq Composite fell 2.95% to 15,169.68. The annual yield on the 30-year Treasury fell 6.6 basis point(s) to 1.818%.

Economic data for the week included the Federal Reserve announcing a faster pace in the tapering off of bond purchases, reflecting stronger growth and inflation pressures, as seen by last week’s high PPI number. Retail sales and industrial production rose, while several regional manufacturing indexes were mixed. Housing metrics also continued to improve.

Global equity markets fell as fears of the omicron variant and Fed tightening intensified toward the end of the week. Bonds fared well with investors seeking risk, which pushed long-term rates lower. Commodities were mixed, with gains in metals offset by declines in energy.

Economic Notes

(-) Retail sales rose 0.3% in November, falling short of the 0.8% median forecast. Removing the volatile auto and gas categories, the gain was 0.2%, while the core/control sales figure excluding several volatile industries showed a slight decline of -0.1%. Individually, gas stations, sporting goods, and food/beverage were up over 1% each in the month, while department stores and electronics each fell by -5%. Retail sales are up 18% from this time last year. It’s possible that, aside from higher petroleum prices affecting gasoline, holiday shopping may have been pushed into earlier months a bit due to fears of transport delays.

(+) The Empire manufacturing index rose by 1 point to 31.9, beating expectations calling for 25.0. Despite the better headline number, though, shipments, new orders and employment all declined by at least a point—although all remained solidly in expansionary territory. Prices paid declined nearly -3 points and delivery times improved, although both remained in problematic territory. Expected business conditions six months out ticked down slightly but remained at a strongly expansionary 36 level.

(-/0) The Philadelphia Fed manufacturing index declined by -23.6 points in December to 15.4, still expansionary but well below the 29.1 median forecast. Under the hood, employment rose to an even more expansionary level, but new orders and shipments experienced dramatic declines in their expansionary trends. Prices paid improved, as did delivery times, but remained high. Expected business conditions six months out declined by almost ten points, but remained in expansion.

(-) The producer price index for November rose 0.8% on a headline level and 0.7% for core, subtracting food and energy prices. Each were several tenths of a percent higher than market expectations, leading to a negative financial market response. The headline figure was notably driven by a 3% increase in energy, with food prices also a percent higher. In the core side, crude materials gained over 4%, reflecting higher costs of both commodities and transit. Year-over-year, headline and core PPI rose at levels of 9.6% and 7.7%, respectively. The bulk of these gains were in the prices of goods, up 15%, relative to services, which were still up 7% for the year. A key component of this is a 44% gain in energy prices over that time. While not as dramatic as CPI, PPI gains have largely been passed through, without too much effect on profit margins, although this varies by sector. This is another measure of inflation reaching multi-decade highs, which has made continued headlines, creating not only pressure on the Fed but also politicians.

(-) Import prices rose 0.7% on both a headline level and when removing petroleum, exceeding the consensus forecast of 0.6%. Stronger gains were seen in industrial supplies, up 2%, while other areas were slightly positive. Import prices represent the ‘nonproductive’ inflation, which does not come along as a byproduct of domestic economic growth. It’s not as critical in a relatively self-sufficient economy such as the U.S., but can devastate emerging market importers if accompanied by their own currency weakness.

(0/+) Industrial production rose 0.5% in November, just a tenth of a percent short of expectations—it’s now above levels pre-Covid. As a sub-component, auto manufacturing rose 3% to the highest rate in over a decade. Utilities production, on the other hand, fell nearly a percent, although that tends to be more closely tied to weather factors out of the economy’s control. Capacity utilization rose by 0.3% to 76.8%. The rising auto production number offers some reassurance that supply chain issues could be improving.

(+) Housing starts in November rose by 11.8% to a seasonally-adjusted average annual rate of 1.679 mil., beating the 3.1% increase expected by consensus. Multi-family and single-family each rose to similar degrees, with strength in the Northeast and South, which gained 28% and 18% respectively; starts in the Midwest fell by -7%. Nationally, starts are up 8% from last year, led by multi-family up 37%, while single-family declined slightly. Building permits increased 3.6% in the month to 1.712 mil. annualized units, exceeding the median expectation of 0.5%. Multi-family rose 5%, about double the pace of single-family. Regionally, the Northeast saw double-digit increases, followed by the South and West, while Midwest permits fell. It does appear that some building activity has moved toward multi-family, now that rent moratoriums are unwinding and rents have adjusted sharply higher in recent months—improving the attractiveness of the sector for investors.

(0) The NAHB housing market index rose a point to 84 for December, matching consensus expectations. This also matches the highest reading for the series (36 year history). While future sales were unchanged, current sales and prospective buyer traffic each rose a point. Regionally, the Northeast gained 10 points, followed by a smaller gain in the South; the Midwest and West each fell slightly. This homebuilder sentiment tended to be a good omen for future housing start activity.

(0) Initial jobless claims for the Dec. 11 ending week rose by 18k to 206k, just above the median forecast of 200k. Continuing claims for the Dec. 4 week fell by -154k to 1.845 mil., which was below the expected 1.943 mil. claims expected. Initial numbers were mixed by state, with no apparent pattern. Year-end can be troublesome for some claims stats, due to seasonal adjustments, making these few weeks perhaps less reliable than normal.

(0) Following the FOMC meeting, committee documents and the subsequent press conference have provided a bit more for investors to evaluate. Debate continued around to how ‘hawkish’ or ‘dovish’ Chair Powell was in his press conference. The two key questions surrounded the treatment of full employment, and, of course, inflation. The Summary of Economic Projections (SEP), containing the ‘dot plot’, showed median expectations for three rate hikes in 2022, another three in 2023, and two in 2024, with long-term ‘neutral’ unchanged at 2.5%. A start to the runoff of the Fed’s immense balance sheet is predicted to start in late 2022, although that is a third step which remains fluid. The Fed’s prediction of this path is far more optimistic than that of other markets, such as that for swaps, which so far show 1.5% as the most likely ending rate.

The Fed has been a little ambiguous about what employment level will serve as ‘good enough’ to reduce or stop accommodative policies. But it seems recent reports, such as high job openings, low unemployment rate, and high quits rate, may be sufficient in their minds. This is despite dispersion in the job market recovery, with certain demographic groups and industries not having yet recovered as well as others. (Some of these issues are longer-term in nature, and can’t be helped by monetary policy alone, which Powell acknowledged directly.)

Insofar as inflation goes, the term ‘transitory’ has been removed from reports and comments for the most part. However, it wasn’t clear that the Fed believes inflation has taken on a more permanent tone, either, noting that supply/demand imbalances remain key factors. As with many mainstream economists, the take is that current inflation levels aren’t permanent, but will remain far more persistent than first expected. According to an Oxford Economics survey, respondents in major developed nations viewed supply chain disruptions as peaking this quarter, but not being fully alleviated until the second half of 2022. But inflation takes many forms, with Powell also acknowledging that ‘asset inflation’ has also been a force, and stock and real estate markets may not react well to sharp interest rate increases.

It’s been feared the Fed has fallen ‘behind the curve’ with inflation, and the somewhat hawkish language was taken positively by markets. This was a bit surprising, due to higher rates being far less productive for equities than lower rates. However, the higher certainty of knowing what to expect from policy, as well as the strong signals from Powell sent about strong demand, economic growth, and jobs improvement provided reassurance, not to mention a willingness to tackle inflation (about which there have been some doubts). But equities fell back later in the week as the implications were digested—particularly in higher-growth and higher-valued technology stocks. All of this policy is based on the current base case, conditions continuing as they are, but Covid omicron variant’s quick spread has the potential to derail the timing of any plans.

Market Notes

Period ending 12/17/2021 1 Week (%) YTD (%)
DJIA -1.67 17.71
S&P 500 -1.91 24.73
NASDAQ -2.94 18.45
Russell 2000 -1.68 11.11
MSCI-EAFE -0.46 8.49
MSCI-EM -1.76 -3.92
BBgBarc U.S. Aggregate 0.35 -1.33
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
12/10/2021 0.06 0.67 1.25 1.48 1.88
12/17/2021 0.05 0.66 1.18 1.41 1.82

U.S. stocks began the week mixed, with higher-than-expected producer prices weighing on sentiment. Stocks turned sharply higher mid-week after the Fed announced a ramp-up in its tapering off of treasury/mortgage bond buying, as well as the estimates of several possible rate hikes next year—the decisiveness of which seemed to help sentiment. Digestion of the Fed’s seemingly hawkish turn soured sentiment later in the week, coinciding with a key options expirations date, as the Nasdaq experienced a -7% intraday drop from peak levels. By sector, the defensive groups health care, utilities, and consumer staples gained over a percent. Losses were largest in consumer discretionary, technology, and energy—all of which were down at least -4% on the week. Real estate also rose in keeping with lower long-term rates. (The weekend’s news included a firm rejection from WV Senator Manchin—a key tie-breaking vote—on the current $2 tril. Build Back Better Plan. Reaction to be determined this week, if it means a reworked smaller bill, but also potentially lower spending and lower tax hikes than first anticipated.)

Foreign stocks experienced similar losses on net as U.S. equities, with the U.K. and Japan faring slightly better with stronger economic data. Also, similar to the U.S. Fed, the ECB decided to begin their own tapering off of stimulative bond purchases beginning in January. This is despite conditions showing less strength in Europe than in the U.S., with inflation levels also lower. The Bank of England went a step further, by raising the key interest rate from 0.10% to 0.25%; this was despite a spike in Covid omicron variant cases over the past few week in London alone. The central bank of Norway also raised rates by 0.25% to 0.50%. Rising Covid restrictions generally tended to weigh on sentiment due to the Omicron variant’s rapid spread (which tended to intensify over the weekend, in some places, to 2020-esque levels).

The Turkish lira plummeted (again) by nearly -10% (and equity markets down nearly -15% in U.S. dollar terms, although they gained in local currency) due to concerns over their monetary policy, an S&P ratings downgrade, and contradictions between what their president is pushing and conventional economic thinking. Inflation over 20% in that country have pressured consumers, particularly due to a high reliance on imports (which become increasingly expensive the weaker their own currency gets). By contrast, policy rates were cut another 1% (5% total in the past quarter) to 14%. Normally, raising rates would be a tool used against higher inflation but also in an effort to boost the value of a currency, as it raises the attractiveness of foreign capital inflows.

U.S. bonds gained last week, due to a ‘risk off’ effect, despite the Fed meeting discussion over elevated inflation; treasuries outgained investment-grade corporates, while high yield and floating rate bank loans were little changed. The dollar rose sharply, punishing foreign developed and emerging market bonds.

Commodity indexes fell, along with risk assets and a stronger dollar, as gains in industrial metals and precious metals were offset by declines in energy. The price of crude oil fell by over a percent to just under $71/barrel, while natural gas prices fell by over -5%.

Mortgage Rates

“Mortgage rates inched up as a result of economic improvement and a shift in monetary policy guidance,” said Sam Khater, Freddie Mac’s Chief Economist. “While house price growth is slowing, prices remain high due to solid housing demand and low supply. We expect rates to continue to increase into 2022 which may leave some potential homebuyers with less room in their budgets on the sideline.”

The 30-year fixed-rate mortgage averaged 3.12% with an average 0.6 point for the week ending December 16, 2021, up from last week when it averaged 3.10%. A year ago at this time, the 30-year FRM averaged 2.67%.

The 15-year fixed-rate mortgage averaged 2.34% with an average 0.7 point, down from last week when it averaged 2.38%. A year ago at this time, the 15-year FRM averaged 2.21%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.45% with an average 0.3 point, unchanged from last week. A year ago at this time, the 5-year ARM averaged 2.79%.

Mortgage Rates

Freddie Mac’s Primary Mortgage Market Survey® is focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20% down and have excellent credit. Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Borrowers may still pay closing costs which are not included in the survey.

Through our relationship with Prestige Home Mortgage in Vancouver, Washington we originate residential and reverse mortgages.

Selected Cryptocurrencies

Symbol Name Price 7d % 30d % YTD % Market Cap
BTC Bitcoin $45,771.12 -5.78% -21.69% 55.91% $865,843,468,009
ETH Ethereum $3,782.45 -5.11% -11.71% 419.08% $450,455,308,282
BNB Binance Coin $509.78 -6.47% -12.94% 1247.53% $85,199,067,459
SOL Solana $170.21 2.88% -20.31% 9159.94% $52,556,720,686
ADA Cardano $1.21 -6.64% -36.67% 591.47% $41,426,746,329
LUNA Terra $73.25 25.75% 67.73% 11234.60% $27,460,840,407
AVAX Avalanche $103.23 23.03% -11.48% 2724.29% $25,172,803,538
DOT Polkadot $23.61 -15.07% -42.90% 184.90% $23,372,009,067
DOGE Dogecoin $0.1631 0.46% -29.57% 2774.71% $21,670,852,083

Information current as of 6:00 AM PST, Monday, December 20, 2021. Source: https://coinmarketcap.com/

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Sources: Ryan Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. 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. FocusPoint Solutions, Inc. is a registered investment advisor.

Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.