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At the close on Friday, the NASDAQ Composite Index was down -6.1% and the S&P 500 was down -3.5%, from their recent record highs. The 10-year Treasury yield, which was 1.67% as recently as the week of Thanksgiving, was yielding 1.35% at the close on Friday. Oil prices have fallen about -22% from their highs and Bitcoin was down about -28% over this past weekend.

Despite the volatility, the ValueAligned Model portfolio is up +16.8% year to date as of Monday, December 3, 2021, while the S&P 500 Index is up +22.5%. We still have about 12% in cash waiting for better prices.

(Greek) Alphabet Soup

A sharp acceleration in economic growth, increasing worries about inflation, a reluctant-to-act-against-inflation Fed, and a strong stock market were quickly displaced by news of a new Covid variant on Black Friday.

Dubbed Omicron and labeled “of concern” by the World Health Organization, the just-named virus first spotted in South Africa sent shudders through global markets.

Of course, it is not the first variant to trouble the world. Covid cases have spiked with the highly contagious Delta already.

Alpha spread into the U.S. early in the year but is of less concern today. Beta, Gamma, Epsilon, Eta, Lambda, Mu and others have not caused much concern among investors amid the growing use of vaccines and therapeutics.

This is critically important to the economy and investors, as these tools have been used in place of economically destructive lockdowns and social distancing restrictions.

It’s not that they eliminate all danger of infection completely. They don’t. But lockdowns and various restrictions had been the preferred tool for government officials.

That said, Omicron is a not-so-subtle reminder that the ever-changing pandemic remains a health threat. And the recent market volatility stems from worries over the new variant’s unknown impact on the global and U.S. economy.

That volatility appears to be brought on by its apparent ease of transmission and anxieties that current vaccines therapeutics may be less effective against Omicron.

But early reports suggest milder symptoms.

However, I must stress that these are early reports, and little is known about the new permutation. Perhaps, the latest volatility could subside if additional bad news isn’t forthcoming, or updates to vaccines and treatments prove to be effective.

The Fed Pivots

Inflation is not transitory and it’s time to begin to end
emergency monetary stimulus

Just four weeks ago, the Federal Reserve (Fed) telegraphed plans to gradually wind down its Quantitative Easing (QE: bond buying which pumps money into the banking system) program by June 2020. In early November, the Fed said it would begin tapering its $120 billion in monthly bond purchases by $15 billion per month in November and again in December. Economic conditions would dictate the pace in 2022.

Most people including the bond futures market did not expect Fed Funds interest rate increases until the end of next year or the beginning of 2023.

But, last week, Fed Chief Jerome Powell testified that the Fed is making plans to accelerate the tapering process at their policy meeting next week, ending QE by March instead.

“At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases… perhaps a few months sooner,” Fed Chief Jerome Powell said on November 30 before a Senate committee.

Though inflation has been stubbornly high, the Fed has been slow to react. As we enter December, Powell has opened the door to a faster taper, which could advance the Fed’s timing of its first interest rate hike.

The abrupt shift opens the door to the Fed raising interest rates next spring rather than later in the year to curb inflation, marking a significant policy pivot by Chairman Jerome Powell shortly after President Biden offered him a second four-year term leading the central bank.

With this move, Mr. Powell would be focusing the Fed’s efforts more on restraining inflation and less on encouraging employment to return to its pre-pandemic levels.

Inflation has surged this year—to 5-7% in October from a year earlier, depending on the gauge used—amid strong demand for goods and services and supply-chain bottlenecks associated with reopening the economy.

In this month’s Client’s Corner by Nick Murray, explains why stocks are the best inflation hedge for the long-term – not gold and certainly not bonds. This essay shows the underlying premise of ValueAligned Investing – direct ownership of stocks of good companies is the best way to make sure you have enough income and returns to more than offset inflation and taxes.

Click here or to download, read and signup for our content.

As Wharton’s Dr. Jeremy Siegel concludes in his classic book Stocks for the Long Run, “In the long run, stocks are extremely good hedges against inflation, while bonds are not .”

I trust you’ve found this review to be educational and informative. Let me emphasize that it is my job to assist you. If you have any questions or would like to discuss anything, please feel free to give me a call. My cell number is 732-284-1267.

 

Please know that we are grateful every day to have a chance to serve you and your family. Thank you.

David