Fourth Quarter 2021 Update

January 25, 2022

Key Points

• Supply-chain problems continue to put stress on the system, making it difficult for producers to find inputs, and pushing inflation higher.
• The Federal Open Market Committee (FOMC) kept its federal funds rate target range of 0% to 0.25% unchanged at its latest meeting in December. However, the central bank increased the amount of its tapering program from $15 billion to $30 billion in an acknowledgement that it has underestimated the amount of inflation.
• Stocks enjoyed a quarter of robust gains, benefiting from strong earnings reports. Profits were strong even as supply chain bottlenecks and uncertainty surrounding the pandemic continue.

4th QUARTER 2021 MARKET COMMENTARY

Below, we’ve highlighted 2021 broad market returns for the fourth quarter and year-to-date time periods:

Source: Refinitiv

THE GLOBAL ECONOMY

The US economy delivered slowing growth in the quarter, having been adversely impacted by the Delta variant of Covid as well as fading economic stimulus. The results were somewhat weaker than the numbers indicated, as consumer spending rose at its slowest rate since the recovery began. Against this backdrop, the Bureau of Economic Analysis released the third estimate of the third quarter 2021 real GDP, a seasonally adjusted annualized increase of 2.3%, slightly higher than the prior estimate, but a significant decline from the 6.7% increase in the prior quarter. The employment situation disappointed in the quarter, as gains were far below expectations. The November report showed that employers added 210,000 jobs in the month, and that the unemployment rate fell to 4.2%. The Federal Open Market Committee (FOMC) maintained its federal funds rate target range of 0% to 0.25% unchanged. However, the central bank increased the amount of its tapering program from $15 billion to $30 billion in an acknowledgement that it has underestimated the level and persistence of inflation. In addition, the FOMC removed the word “transitory” from its accompanying statement in describing the high inflation rate. The FOMC’s “dot plot,” a forecast of future rate changes, indicates the committee now expects three 25 basis point rate hikes in 2022, and another three in 2023.

EQUITIES

Stocks enjoyed a quarter of robust gains, benefiting from strong earnings reports. Profits were strong even as supply chain bottlenecks and uncertainty surrounding the pandemic continue. In addition, improving earnings have meant that valuations have declined from their all-time highs earlier in the year. Broad-based indices posted their seventh consecutive quarter of gains, and closed near record levels. The S&P 500 rose steadily from the beginning of the quarter through early November, and then treaded water into December as investors digested the news of a surge in Covid cases. The index then ended the year trending higher, finishing near all-

FIXED INCOME

The Federal Open Market Committee (FOMC) kept its federal funds rate target range of 0% to 0.25% unchanged at its latest meeting in December. However, the central bank increased the amount of its tapering program from $15 billion to $30 billion in an acknowledgement that it has underestimated the amount of inflation. In addition, the FOMC removed the word “transitory” from its accompanying statement in describing the high inflation rate. The FOMC’s “dot plot,” a forecast of future rate changes, indicates the committee now expects three 25 basis point rate hikes in 2022, and another three in 2023. As a result of persistent inflation above its 2% target, the FOMC also moved to accelerate the pace of its tapering program, doubling the amount of its asset purchase cutbacks to $30 billion per month.

Fixed income securities’ prices were mixed to slightly lower (and yields higher) in the quarter as inflation proved to be higher and more sustained than anticipated. While economic growth slowed somewhat during the quarter, inflation remained persistent due to ongoing supply chain issues and staffing complexities caused by the pandemic. By the end of the quarter, the yield on the benchmark 10-year US Treasury note was little changed, ending at 1.51%, compared to 1.49% on September 30.

SUMMARY

The global economy continues to improve, with most regions now better off than six months ago. The Omicron variant of the virus introduces some uncertainty into the near-term outlook, but most analysts believe that it will not derail the overall momentum of the recovery. Supply-chain problems continue to put stress on the system, making it difficult for producers to find inputs, and pushing inflation higher. While most of the world is in recovery mode, economists expect there will be greater divergence among regions and countries in 2022 as virus mitigation and central bank support policies differ. An expected common thread for the next year is that there will be monetary policy normalization, as central banks step back from the aggressive monetary policies that have defined the period since the onset of the virus. The FOMC is taking the lead in this area, as it is aggressively tapering the asset purchases it has been making, such that the program is anticipated to end in March 2022. In addition, economists expect the FOMC will move to raise the federal funds rate by September 2022 at the latest. Analysts anticipate that the US and China will lead the way in terms of growth in 2022, with GDP forecasts of 4.4% and 4.7%, respectively, in 2022. China is dealing with some headwinds, including a cooling off in its real estate market and other financial sector risks. The euro zone’s recovery has been somewhat better than anticipated, and economic growth in the region is expected to be 4% in 2022. In terms of equity markets, analysts caution that 2022 is likely to be more volatile than 2021, as monetary policy becomes less aggressive, and earnings moderate.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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