Market Recap: December 2021

We are approaching the two-year mark of the onset of the COVID-19 global pandemic. Over the past two-years, global central banks took many measures to fight the economic implications of an economic shutdown. Those policies, along with supply chain disruptions, have cause inflation globally to tick up at an increasing pace. In the United States, inflation has been running above the Fed’s stated inflation mandate of 2% for nine consecutive months. Now, the Fed is starting the process to reverse some of the loose monetary policies to fight inflation.

With annual inflation coming in at +6.8% at the end of November last year (+7.0% in December), the Federal Reserve changed its tune towards inflation in late 2021. Fed Chairman, Jerome Powell, announced in November that it was time to retire the use of the word “transitory” when talking about inflation. In December, the Fed announced they would increase the rate at which they are reducing purchases of US treasuries and mortgage-backed securities from the market.

The more hawkish Fed tone and rate hike expectation have weighed on fixed income markets to start the new year. Markets are anticipating at least three interest rate hikes in 2022. Though the Fed is preparing to take action to stifle further increases in inflation, more persistent factors of inflation like raising wages and rents will likely keep inflation elevated for a longer period.

COVID-19 continues to be an unknown, however following initial drawdowns from the discovery of the Omicron variant, recent financial market impacts have been moderate.

Investors should expect continued bouts of volatility in the coming months primarily due to the Fed’s changing policy stance. However, volatility does not always result in poor performance. Since 1983, the average intra-year drawdown in the S&P 500 was -9.3%, while the average calendar year return was 13.5%.

Though volatility doesn’t necessarily mean lower returns, it does tend to lead investors to make emotional decisions when it comes to allocating capital. We continue to recommend maintaining a well-diversified portfolio and staying invested through volatility with a long-term perspective.

Please let us know if you would like to discuss recent market moves or any fears you may have. We are here to serve you and help you achieve your financial objectives despite swift market moves expected in the near-term.

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