Did You Hear What I Heard?
In keeping with the Christmas song theme, I borrowed this week's musings headline from the Christmas classic, "Do You Hear What I Hear?"
The song was written in October 1962 by Noel Regney, WWII survivor, and his wife Gloria Shayne. They wrote the song during the Cuban Missile Crisis as the country was gripped in fear and despair (not too dissimilar from our current national atmosphere). Noel wrote the words after seeing two babies in their strollers smiling at each other. The song was first recorded by the Harry Simeone Chorale and released shortly after Thanksgiving in 1962.
The Fed has recently (finally) abandoned the notion that inflation is "transitory." This revelation and the idea that tapering of bond purchases could be on a faster pace than originally advertised has caused markets to adjust. The "omicron" variant of COVID caused an unnecessary panic on Wall Street last week and this week. Data on the consumer is a bit mixed as we close out the year. Here's what we're seeing so far this week...
Did You Hear It - Inflation Not Transitory. As we have been saying for several months now, inflation is here to stay and Fed Chairman Powell finally acknowledged it this week. Not only is inflation not transitory, but the current pace of inflation, according to Powell, "may likely force the Fed onto an even faster tapering path."
Were it not for the current over-reaction to Omicron, bond yields would likely be moving much higher. The original path of Tapering was to commence in December of this year and was to be on the scale of $20-30 billion per month and end in June of 2022. It now looks like the Fed will announce a more aggressive pace of Tapering, which began last month, and likely to end by March of next year. This speaks to the threat of inflation and why the market responded by selling off another 1.8% on Tuesday of this week on top of the 2.2% sell off on Friday of last week. Great timing by the newly re-appointed chairman.
COVID - The Christmas Gift That Keeps On Giving. Cousin Eddie probably said it best when he congratulated Clark for his one-year membership in the "Jelly of the Month Club." According to Eddie, "Clark, that's the gift that keeps on givin' the whole year." With regard to COVID, we would have to respond in-kind, "That it is Edward." Last year, at this time, the Delta variant was in full swing and cases had risen from a low of 36,000 per day to 203,000 per day. This year, cases have seen a slight rise in the Midwest and North, but overall, cases are up only 1.8% since making a 6-month low on November 1st. The glee all changed on Friday when a South African doctor discovered and announced a new variant of COVID known as "Omicron." This new variant, according to the doctor who discovered it, is much more mild than previous variants.
And so far, the small number of cases of the variant that have been identified in the U.S. have been mild in nature with relatively quick recoveries. Yet, concerns over global growth were renewed amid the discovery of the variant and markets sold off in response. Wall Street has since adjusted and most analysts do not view this new variant as a major concern. Quite frankly, we're in a much better situation this year compared to last year. The virus has a much higher and more broad reproduction rate in November of 2020 versus November, 2021. Some work that has been done by Dr. Jacques Fantini, of the Aix-Marseille University in France, has been quoted by some virologists as encouraging news about the Omicron variant. According to Dr. Fantini, his "Transmissibility Index" or T-index shows that the original strain of COVID had a value of 2.16, while the Delta variant had a value of 10.67. His index measures the interaction between virus cells and host cells. The higher the value, the more transmissible the virus. The new Omicron variant only has a T-index value of 3.9. J.P. Morgan recently indicated that the dip in the markets was a buying opportunity and not the end of the world. In fact, if Omicron turns out to be mild and not very virulent, markets could move much higher on both the over-reactive selling and better-than-expected future growth. Time will tell.
Holiday Sales On Track, But Not On A Traditional Path. Holiday sales look to be on track as originally reported by the National Retail Federation. A few weeks ago, the expected increase in holiday sales year-over-year was growth of between 8.5% and 10.5%. The bulk of sales traditional comes over the Thanksgiving weekend - Black Friday and Cyber Monday.
However, there were fewer shoppers over the Thanksgiving weekend. The number of shoppers was down 6.6 million in 2021 versus 2020 and down 9.8 million this year from 2019. However, that figure is a bit skewed due to the shipping crisis. If we look at the holiday sales starting on November 1st through Cyber Monday, the sales figures are up 11.9% year-over-year. While Black Friday's tally and Cyber Monday's tally are disappointing compared to previous years, the overall spending is higher.
In fact, U.S. Redbook Sales on a year-over-year basis show a very strong U.S. consumer heading in to the holidays. Redbook tracks the same-store sales of more than 9,000 retailers on a weekly basis. You can see from the graph that sales have trended much higher over the last 5 months. What's a concern is that the trend is significantly higher than 2019's trend, which is pre-pandemic.
The question becomes, with higher inflation, how much longer can the consumer hold up the U.S. economy? Consumer Confidence, as measured by both the Conference Board and the University of Michigan has dipped in recent months. Are we beginning to see the early signs of consumer fatigue? While holiday sales will likely propel markets higher into the end of December, setting us up for the perennial Santa Claus rally, next year could lead to a pause in aggressive discretionary spending.
What Are The Prospects For 2022? There are headwinds and positives heading into next year. On the positive side, the consumer is still very healthy. If that continues, two-thirds of the economy will be on solid footing. While interest rates are rising, we are coming off extremely low levels. This is a positive to mortgage rates and consumer loans. And, let's face it, the money supply in the marketplace is plentiful. However, on the negative side, there are headwinds afoot. Inflation and oil do not show any signs of slowing down. Producers are making more frequent statements that they are going to have to raise prices consumers pay for their products. If the Biden administration is successful in raising fees on oil leases, those costs are likely to be passed on to consumers. Interest rates could increase substantially making access to capital more expensive. There is no suggestion that the supply chain crisis will end before June of next year. Given these headwinds, we'll need to adjust our capital market assumptions heading into 2022 and perhaps, make some shifts in asset allocations.