The stock market ended 2021 with a Santa Claus rally, even as the spread of COVID-19’s Omicron variant caused states to reimpose masking requirements and other restrictions. Warnings that commerce would be restricted followed many as countries reimposed restrictions on travel and the size of gatherings. How much will economic activity be curtailed even though the Omicron variant has yet to pose serious death threats in North America? Will all be well in the U.S. or will Omicron create noticeable economic disruptions?
During the Thanksgiving week, the Omicron variant was spreading rapidly in South Africa, but concerns about any serious health issues there have diminished rapidly. If that pattern holds, Wall Street hopes that the negative impact of Omicron will be minimal here, too. But, even with fewer deaths resulting from the Omicron variant, there are signs that rising cases are disrupting employment critical to health care and other industries. However, other news remains positive.
Major averages traded lower for the final session of 2021 after some late selling action, but closed out the year with strong gains. The S&P 500 Index fell 0.3 percent, ending December about 4.5 percent higher, the third-best month of the year and best December since 2010. For the year, the S&P 500 Index was up about 27 percent, outpacing the Dow and the Nasdaq by a wide margin. The S&P 500 set 70 all-time highs during the year, the most in a single year since 77 highs in 1954.
Some of the smartest market forecasters, analysts and chief investment officers are predicting that the first half of 2022 could be quite turbulent for the stock market as the Fed tapers quantitative easing by the end of March, followed by three rate hikes. Fed Chair Jerome Powell didn’t mince words with the usual “Fedspeak” that investors have come to expect. And that was before considering the impact of Omicron’s likely spread.
Many of my colleagues on Wall Street expect a higher market in the month of January, expecting most current stock market fears to diminish in January. Discounting the negative impact of the Omicron variant, more growth is expected to be reported in late January. The Atlanta Fed is currently estimating 7.2 percent fourth-quarter GDP growth. Crude oil prices are now moderating, and Treasury bond yields have meandered lower. On top of that, optimists think that fears of the spreading Coronavirus may abate.
Regarding the port bottlenecks, major European ports like Hamburg and Rotterdam are “roughly flat or lag behind 2019 levels,” according to The Wall Street Journal. Major U.S. ports are processing almost 20 percent more container volume than they did in 2019, but backups continue. While it is positive that U.S. consumers continue to boost their spending on goods, how much of that is catch-up demand driven by excess cash? It is notable that European consumers remain much more cautious.
According to the Bank of England, the U.S. accounts for almost 90 percent of a 22 percent worldwide surge in durable goods orders since the end of 2019. Overall U.S. GDP growth is expected to have grown at a nearly 6 percent annual pace for 2021, and perhaps 4 percent in 2022. The primary reason that the U.S. dollar is still strong is due to our higher GDP growth, as well as absolute interest rates higher than anything offered in Europe or Japan. But what about huge U.S. deficit spending and money supply growth?
Can this economy and the market learn to prosper on their own without financial help from Uncle Sam generating huge inflation? Assuming inflation persists or gets worse through the first half of 2022, it may be prudent for income investors to investigate sectors with reliable dividends and yields. A strong U.S. dollar might eventually help suppress inflationary pressure, since almost all commodities are priced in dollars. Approximately half of the sales in the S&P 500 come from outside of the U.S. Multinational companies may be posting better-than-expected sales due to a “currency tailwind.”
It is hard to be overly concerned about 2022, since the U.S. continues to drive global growth. But we should not underestimate the negative impact of stagflation. Just ask those of us who lived through the late 1970s and early 1980s about challenging times created (back then) by incompetent government leaders!