December was a fitting end to global markets for calendar year 2021. A strong “risk-on” theme was present despite mixed macro catalysts. Equity and credit markets posted strong returns and interest rates rose as the year came to a close.
Despite the emergence of the Omicron variant, equities remained the preferred investment, with both the NASDAQ and Dow Industrial Average Index recording returns of over 20% in 2021. The S&P index soared 4.47% during December ending +28.68% for 2021. The U.S. 10-Year Treasury moved to just above 1.50%, but shorter bonds saw sharper moves higher as the 2 year Treasury note reached yields above 0.75% during the month.
On the first trading day in December, a large risk rally reversed course as the first case of Omicron was reported in San Francisco. Markets ended sharply lower, but data reports on the new variant were very fluid. The following day, equity markets posted their biggest gain of 2021.
Economic data was led by an unfriendly miss on the employment picture. Non- farm payroll data recorded only 210,000 new jobs, much less than the expected 550,000. Despite this headline, the unemployment rate dropped to 4.2%. Strong inflation data followed. On December 9th, the consumer price index recorded its highest reading in 39 years and PPI followed with a core reading up 7.7% from the previous year, this was the largest recorded boost in core figures. These releases were surely a factor in allowing the FOMC to accelerate their removal of stimulus.
At the FOMC Meeting on December 15th, as markets expected, the Fed doubled the reduction of bond purchases, which would allow the “tapering” process to end by March 2022. This allows the Fed to tighten short-term rates earlier if necessary. Fed fund futures quickly priced in the expectations of three 25 basis point short-term rate increases in 2022. The yield curve flattened and shorter bonds underperformed longer duration bonds. Hawkish inflation comments from Fed officials followed days after their announcement.
Spikes in Covid cases were being reported throughout the month as the holiday season was in full swing. However, it was Congress that seemed to be worrying investors more than the new variant. Particularly, Senator Joe Manchin, announced he would not vote for President Biden’s “Build Back Better Act.” Investors feared this would end the Administration’s $1.75 trillion dollar social plan, and economists predicted it would create a hit to US growth in 2022. One last political division, followed by some relief as negotiations persisted, but a clear message that large-scale government spending with inflation is not favorable.
Thin holiday trading began as political negotiations continued, along with covid developments of a mild variant, vaccinations, and solid economic data gave investors comfort. The final part of the year gave way to a “Santa Claus” rally in risk markets.
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