In this week’s Monday Market Insights, we discuss the Federal Reserve’s plan to withdrawal pandemic-related stimulus, recent investor sentiment readings, and a contrarian view on 2022 inflation. In the chart of the week, we highlight the recent shift in leadership between Growth and Value stocks, and finally, we discuss the resurgence of the consumer staples sector.
- Fed Signals Anything is Possible. The much-anticipated December Fed meeting did little to cement the path of future monetary policy. Creating optionality for their policy path was the Fed’s goal, and they succeeded. As expected, the Fed doubled the reduction in monthly bond purchases, leaving the door open for faster rate hikes if inflation persists at current levels. Faster rate hikes are far from guaranteed, however. If inflation begins to cool, the Fed will likely move more slowly than the current forecasts imply. If inflation remains high, the Fed seems inclined to move more quickly. Our view is that inflation begins to trend lower while economic growth falls short of their projections, therefore promoting fewer interest rate hikes than the market currently anticipates.
- Investor Confidence Starting to Return. At extremes, surveys of investor confidence are often very good contraindicators of stock market performance – extremely bullish readings can often precede market correction, while extremely bearish readings are usually a good sign that the market has bottomed. After the post-Thanksgiving market volatility, Investor Intelligence data showed that 39.8% of respondents were bullish, more than 10% below the 10-year average. This represented the lowest reading since the depth of the 2020 market low. We believe this lack of enthusiasm is a positive for stocks, and although 43.9% of respondents were bullish in the latest survey, we are still far from levels that might signal trouble for stocks.
- 2022 – Too Many Goods, Not Enough Demand? High inflation is a pervasive narrative. However, is it one that is likely to persist throughout all of 2022? We’ll take the other side of that trade. For example, retailers appear to be operating under the assumption that the post-COVID-19 demand surge we’ve experienced for the past year is going to persist. This view has created seemingly endless interest in building inventory to meet that assumed future demand – hence the backlog of over 90 container ships off the coast of Los Angeles and Long Beach ports. A weak November retail sales print last week may be an early sign of demand for goods peaking. We believe demand was pulled forward versus permanently increased, and 2022 will bring a shift of spending on goods to spending on services. This is both a risk to retailers and a potential headwind to further increases in inflation.
Returns Table
| Equities | Week(%) | YTD(%) | 1-Year(%) | 3-Year(%) | 5-Year(%) | Div Yield |
|---|---|---|---|---|---|---|
| S&P 500 | 0.6 | (0.8) | 26.1 | 24.25 | 17.94 | 1.22 |
| Russell 1000 Value | 1.2 | 1.5 | 22.7 | 16.79 | 11.35 | 1.77 |
| Russell 1000 Growth | 0.0 | (3.5) | 23.4 | 30.79 | 23.83 | 0.64 |
| Russell 2000 | (0.8) | (3.1) | 3.3 | 16.00 | 11.25 | 0.94 |
| MSCI EAFE | (0.5) | 0.7 | 10.3 | 12.91 | 9.74 | 2.51* |
| MSCI EM (Emerging Markets) | 3.7 | 2.9 | (4.0) | 11.03 | 10.03 | 2.38* |
| Fixed Income | Week | YTD | 1-Year | 3-Year | 5-Year | Div Yield |
| Bloomberg Barclays US Aggregate | (0.3) | (1.5) | (1.9) | 4.21 | 3.16 | 1.98 |
| Bloomberg Barclays US High Yield – Corporate | (0.2) | (0.6) | 4.6 | 7.50 | 5.93 | 4.45 |
| Bloomberg Barclays Municipal Bond | (0.7) | (0.9) | 0.7 | 4.30 | 3.74 | 1.31 |
| Bloomberg Barclays Global Aggregate x US (Country) | 0.3 | (0.3) | (5.8) | 2.44 | 2.94 | 1.15 |
| Commodities | Week | YTD | 1-Year | 3-Year | 5-Year | Current Level |
| Crude Oil WTI (NYM $/bbl) Continuous | 6.2 | 9.9 | 55.3 | 17.0 | 9.3 | 82.6 |
| Natural Gas (NYM $/mmbtu) Continuous | 16.6 | 21.6 | 59.8 | 13.7 | 5.1 | 4.3 |
| Gold NYMEX Near Term ($/ozt) | 0.1 | (0.0) | (0.9) | 12.4 | 8.8 | 1,827.2 |
| Copper Cash Official LME ($/mt) | (1.2) | (0.2) | 21.1 | 17.7 | 10.9 | 9,665.0 |
| Currencies | 1 Week Ago | YTD | 1-Year Ago | 3-Years Ago | 5-Years Ago | Current Level |
| U.S. Dollar per Euro | 1.13 | 1.24 | 1.22 | 1.15 | 1.07 | 1.14 |
| Japanese Yen per U.S. Dollar | 115.79 | 115.16 | 104.20 | 108.41 | 114.03 | 114.85 |
| U.S. Dollar per British Pounds | 1.36 | 1.35 | 1.36 | 1.28 | 1.22 | 1.37 |
Chart of the Week: A Subtle Spark in Value Stocks Relative to Growth Stocks
Takeaways:
- The performance of Growth relative to Value stocks recently peaked, almost to the penny, at its September 2020 zenith.
- Time will tell whether this proves to be a durable trend change, but we are paying close attention to this relationship as the calendar turns.
- We believe Value may make one last charge, before giving way to Growth in the second half of 2022.
Commentary: Consumer Staples – Back from the Dead?
Last week, consumer staples traded to a 3-month relative high versus the S&P 500 for the first time in 439 trading days. After ending similarly long (but shorter) streaks of relative underperformance in 1993, 2000, 2004, 2014, and 2018, consumer staples went on to perform quite well over the next six months. Although we don’t have a particularly strong view on the consumer staples sector, the relative outperform does represent a tide-shift as it relates to market leadership. The outperformance of consumer discretionary versus consumer staples since the 2020 lows has been a clear signal of risk appetite in the stock market. The recent reversal may be more noise than signal, but we are paying close attention.
