Watch the CPK Market Action Report: December 2021
Equities saw substantial gains for most of November before taking an abrupt about face on the Friday after Thanksgiving over concerns of a mutated Covid variant reviving fear of potential new economic restrictions in addition to a surprising announcement from the Fed. Will the selloff be short lived, or could this be the sign of more intense selling yet to come?
Watch the Market Action Report now:
December 2021
INTRO TAG
Equities saw substantial gains for most of November before taking an abrupt about face on the Friday after Thanksgiving over concerns of a mutated Covid variant reviving fear of potential new economic restrictions in addition to a surprising announcement from the Fed. Will the selloff be short lived, or could this be the sign of more intense selling yet to come?
That action starts, NOW!
INDEX PERFORMANCE RECAP
The major indices suffered a swift pullback at the end of the month. The Dow Jones Industrials was down 5.06% and S&P 500 posted a loss of 2.12%. Meanwhile, the tech heavy Nasdaq closed down just 1.85%.
EQUITY UPDATE
While the equity indexes as a whole may have closed down just small single digits from where they started the month, it was the peak to trough declines during the month that everyone really felt. Both the S&P 500 and the Nasdaq Composite experienced peak to trough losses of more than 5% for the month with most of those losses taking place during the last 4 trading days of the month. However, losses in the cap weighted indexes that are heavily overallocated to just a handful of stocks did not necessarily reflect the losses of individual stocks in the broader markets. In many cases, those losses were substantially more.
There were really three main reasons for the fast selloff, a new Covid variant emerged, the Fed’s announcement that they would be eliminating quantitative easing sooner than expected and Fed induced fears that inflation should no longer be viewed as short term.
BOND UPDATE
The announcement of the Covid variant in addition to the Fed’s comments also hit Treasury yields pretty hard this month, particularly the medium and longer term Treasuries. After dropping to 1.43% in the first week of trading, the 10yr Treasury rose to the 1.66% level before quickly retracing all the way back down to its low for the month. Reviewing the 10-2 spread, this has now crashed down to .91%. While this is still solidly positive, this tightening has brought us to an 11-month low and is close to breaking through the .89% level from January. This is important data to keep an eye on as it traditionally has been a very good indicator of a potential end for bull markets.
COMMODITY UPDATE
The movement in Crude oil has been nothing but impressive. Crude oil started the month just above $81 a barrel. Including a 13% rout on the last Friday of the month, the black gold closed out the month down more than 16% at $67.89. For now, the outlook on oil is neutral as the markets await clarity on Omicron’s potential impact on consumer demand and OPEC’s decision to either maintain current plans to increase production in December or pause.
Copper was able to settle into a range between $4.25 and $4.50 for the month, closing out at the bottom end of the range. The story remains the same here that until we see a breakout above $4.75 or below $4.00, we will be maintaining a cautiously bullish stance based on the economy and global risk assets.
After clearing a 4% gain mid-month, Gold also retraced back to just below where it started the month at $1,778/oz. If inflation continues to rise, so too should the yellow brick. However, if inflation is able to cool off, Gold will most likely lose support and fall as a function of rising real interest rates and a continued rise in the dollar.
CURRENCY UPDATE
Last month, I stated that the dollar should remain in its trading range unless there was going to be an impactful change in the outlook of the Fed’s QE tapering plans. Ironically, we got news from the Fed that the tapering would be taking place more aggressively than anticipated. As such, the dollar rose from the $93 range to just about $96.80 before closing out at $96. Based on the recent news from the Fed in addition to Omicron, it is unlikely the dollar can rise substantially from here in the short term.
ECONOMIC UPDATE
As I mentioned earlier, Jerome Powell, the Chairman of the Federal Reserve made surprising comments this month stating that QE tapering needed to be accelerated and that the term “transitory” should no longer be used to describe inflation. His comments definitely added fuel to the panic selling that took place at the end of the month. Keep in mind, accelerated tapering will not cause a correction by itself. While it might cause increased volatility, it will take sooner than expected rate hikes, say June 2022 or sooner or numerous rate hikes in 2022 to really put a hawkish headwind on stocks and be a real concern to the rally. Although it appears we could be headed in that direction, we are not there yet.
THE WRAP
It is my belief that volatility will remain the headline story as we await news on the Omicron variant. Even if it turns out that we get a worse case scenario, it is highly unlikely we will have an economic shutdown like we did last year. We have a high vaccination rate in this country and even if there are breakthrough infections, our medical and pharmaceutical professionals are in a much better place to take on any new variant than we were a year ago.
One thing I have learned after being in this profession for over 20 years is that it pays off to avoid making knee jerk reactions to the news. I always take the time to review the facts and make logical and reasonable decisions based on those facts. My approach will be no different to this news.
CPK FOCUS
For the month of December, the cash allocation in our equity models remains between 30% and 40% due to the model’s more aggressive nature. Our broad focus remains on Domestic Equities and Commodities.
For Domestic Equities, our attention remains with just Mid Cap Growth and Small Cap Growth with an emphasis in the Technology, Consumer Cyclicals, Financials, Energy and Real Estate sectors.
As for Commodities, our focus remains on Energy and Industrial Metals.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISK, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the December 2021 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
For this guy, that action starts, NOW!