The mistake we make as investors is when the market’s going up, we think it’s going to go up forever. When the market goes down, we think it’s going to go down forever. Neither of those things actually happen. It doesn’t do anything forever. It’s by the moment. – John Bogle
Santa Claus didn’t disappoint investors last week as the Dow Jones Industrial Average and the S&P 500 Index both added about 1% while the Nasdaq Composite Index closed virtually flat. The last week of the year is typically positive for the market about 80% of the time and despite the rising number of positive cases of the Omicron variant, this statistic again held true to form. During the week, the S&P 500 Index posted its 70th record high close of the year, the second highest number of record closes for the S&P 500 during a calendar year since 1995 when there were 77 record closing highs. The Dow notched its 45th record high close and the Nasdaq managed to end the week only about 2% below its all-time high. It was the first time in five years that the S&P 500, with a year-to-date return of nearly 29%, outperformed the technology-heavy Nasdaq Composite Index, which was up about 22%. All eleven sectors of the S&P 500 posted double digit returns with the energy sector posting the best performance with a total return of 56% and the communications services sector posting the worst with a total return of 14%. As expected, trading volumes were light due to the holidays and there was a paucity of key economic data that could potentially move markets in either direction. There also were no quarterly corporate earnings reports of any significance as investors await fourth quarter profit reports that will begin in a few weeks. When the S&P 500 is up at least 20% heading into the final week of the year, as it was last week, the path of least resistance is almost always higher to end the year and that was the case once again. Next week promises to be different, though, as markets must digest the minutes from the most recent Federal Reserve meeting, the December employment report and other key economic data on the calendar.
Despite supply chain disruptions, higher prices and the Omicron variant, holiday sales rose 8.5% in 2021 from the previous year, the best results in 17 years. Weekly jobless claims were 198,000, lower than estimates by economists of 205,000. The December Chicago Purchasing Manager’s Index (PMI) was also better than expected while the Case-Shiller 20-City Home Price Index climbed 18.4% in October from a year earlier, in line with expectations, as the housing market has been strong due to low mortgage rates and a limited supply of homes on the market.
For the week, the Dow Jones Industrial Average rose 1.1% to close at 36,338 while the S&P 500 Index gained 0.9% to close at 4,766. The Nasdaq Composite Index edged slightly lower to close at 15,645.
The employment report for December is expected to show that about 375,000 new jobs were created and that the unemployment report fell slightly from 4.2% to 4.1%. Both the ISM manufacturing and services sector Purchasing Managers’ Indices (PMI) are forecast to be above 60, much higher than the 50 threshold that indicates expansion. Construction spending in November is expected to be strong and could be at a record high.
The Federal Open Market Committee (FOMC) will release minutes from its December monetary policy meeting that should show that Fed officials are becoming less accommodative as the first interest rate hike could come as early as the spring.
The most notable companies that are scheduled to report quarterly earnings this week are Walgreens Boots Alliance, Acuity Brands, Conagra Brands and Constellation Brands.
After finishing last year with some positive momentum in the midst of very thin trading and a lack of economic data or important news events, the market will return to a more normal environment this week. The focus will first be on the release of the Federal Reserve minutes from the December meeting when the Fed announced it would accelerate the tapering of its $120 billion a month bond buying program. The timetable now for its completion is the end of March instead of June, opening up the possibility of the Fed’s first interest rate hike since 2018. The federal funds rate will increase from zero and the Fed has forecast a total of three such rate hikes this year, bringing the benchmark interest rate to a range of between 0.75% and 1.0% by the end of the year. It will be interesting to see how both the stock and bond markets react to a less accommodative Fed and the tightening of monetary policy. The stock market has certainly benefited from the excess liquidity and easy money so it’s safe to assume that there will be increased volatility this year as higher interest rates could be a headwind. The yield on the 10-year Treasury ended the year at 1.52% while the 2-year Treasury yield closed at 0.73%. In the face of higher inflation and the prospect of several interest rate hikes, it could be another difficult year for bonds as many economists are forecasting that the 10-year Treasury yield could be as high as 2.0% by year-end. (Bond prices and yields are inversely related). With the increased probability of a more hawkish Federal Reserve this year, it will be more important than ever for the economy and corporate profit growth to remain strong.