Editor’s Note: There are no important economic reports coming out while Robert Genetski is taking a Christmas vacation, he says in his final report for 2021.
The Week That Was
The Fed intends to end purchases of securities in March and they anticipate three 0.25 percent hikes between the spring and the end of the year. These are likely to begin at the May meeting.
Powell downplayed the idea there is 6-to-9-month lead between Fed moves and its effect on the economy. Instead, he believes the transmission mechanism is much faster today since financial markets react almost instantaneously.
Markets have always reacted instantaneously. The economy cannot. A failure to grasp this concept is why the Fed was so wrong on inflation this year, and is likely to be wrong expecting inflation to be 2.2 percent to 3.0 percent in 2022.
Yesterday’s Markit survey of December business activity remained strong. The expansion in new orders was the sharpest in five months while price increases hit a new record high.
The December Homebuilders Survey raised their confidence level to 85 from 84. New housing activity remains super strong. Builders expect the strength to continue in spite of supply problems and anticipated increases in interest rates.
Lastly, the Fed’s November manufacturing index increased at a 9 percent annual rate, behaving more like other manufacturing indicators.
Things to Come
The Grinch put most of the upcoming economic news on the last working day before the Christmas holiday.
Fortunately, none of the news will have much of an impact. The report on November spending and wages and on new orders for durable goods are both from a month ago.
Spending and wages should continue to rise at annual rates of annual rates of 8 percent to 10 percent, while the consumer inflation rate remains close to 6 percent.
New orders for durable goods should also remain strong.
Thankfully, there are no important reports due for the week after Christmas. I planned to take the week off to celebrate with kids and grandkids and family.
I wish you and your family a Merry Christmas, a belated Happy Hanukkah and the most Blessed and Prosperous New Year ever!
Market Forces
It was an erratic week for stocks, declining, rising, then declining. For the week, the S&P and Dow were little changed, the Nasdaq fell 2 percent and small cap ETFs fell 3 percent.
The Fed’s meeting led to some immediate reassurance the Fed would begin to deal with inflation. Yesterday’s decline may have been in reaction to renewed concerns over Omicron, higher interest rates or nothing.
Technical indicators remain mixed. In a positive sign, the Dow and S&P500 moved above their 10 and 21-day averages. On the downside, the Nasdaq fell sharply below its 50-day average, while small cap stocks are in a bear market, roughly 10 percent below their all-time highs.
With the S&P500 at 4669, it remains less than 1 percent below its all-time high and 35 percent above its fundamental value.
Outlook
Economic Fundamentals: neutral
Stock Valuation: S&P500 overvalued by 35 percent
Monetary Policy: expansive