Risk assets, in general, fell again last week as concerns over inflation, Federal Reserve rate hikes, the omicron variant, and geopolitical tension weighed on investors.
Rising costs have been a reality for much of 2021, though we anticipate the pace of increases to moderate in 2022 as energy prices and supply chain disruptions stabilize. Household and business spending are also expected to exhibit more historically normal patterns this year as fiscal and monetary stimulus are reduced (an acknowledgement that the economic recovery is well on-track).
A new year is underway, and it started off in a relatively inauspicious way for market participants. First the positive news – the US unemployment rate fell to below four percent in December and employee wages grew, as well.
For many investors, 2021 was a year of robust gains with the S&P 500 index returning nearly 29%, but there was significant dispersion in results across industries and geographies. Areas like emerging markets declined 3% as a category as geopolitical risk in China and pandemic-related challenges continued to weigh on these markets.
As we approach the beginning of a new year, it is only natural to reflect upon the year that was to remind ourselves how we arrived at this moment.
The past week was filled with both ups and downs for risk assets, as markets struggled to digest news related to the Covid-19 omicron variant, surging inflation, and the latest Federal Reserve (Fed) messaging.
Inflation was once again a headline last week as the US Consumer Price Index (CPI) released its most recent reading. The November CPI report stated that inflation increased 6.8% year-over-year, marking the highest advance in 39 years, slightly higher than October’s 6.2% print.
The overall environment for accepting investment risk is neutral. US Economic recovery solidly on track, and the robust nature of the recovery has led to higher prices as well as challenges supplying finished goods fast enough to meet demand.
The Friday following Thanksgiving, typically a quiet day in equity markets, was anything but quiet this year as news of a significantly mutated COVID-19 variant discovered in South Africa led to a “sell first ask questions later” trading day. The S&P 500 index declined 2.3%, but many “reopening” stocks like airlines and cruise lines declined 10% or more.
Electric vehicles, also referred to as “EVs”, are getting renewed interest from both consumers and investors after Rivian stock skyrocketed after going public with the sixth largest initial public offering in US history. The EV market, which has been dominated by Tesla for the past decade, is getting more crowded by the day as newer companies such as Rivian, Lucid, Lordstown, and Nikola join larger established automotive companies like Ford, General Motors, and Toyota in launching new options.