With Thanksgiving in the rearview mirror, the holiday season is upon us in markets across all asset classes. The end of 2021 comes as markets face the prospects of central bank tightening, higher taxes, and new outbreaks of another COVID-19 variant.
On Friday, December 3, the latest jobs report had good news: the unemployment level fell to 4.2%, and wages grew. The bad news was that the private sector only created 210,000 jobs in November compared to market expectations for 573,000 jobs. The stock market did not like the report. All the leading indices fell, with the VIX rising to the highest level since early February 2021 at over 35 and settling north of 30.
The holiday season is a time where consumption peaks. However, supply chain issues continue to plague businesses and consumers, translating into problems for investors.
The supply chain will be a problem for well into 2022
- The new COVID-19 variant could choke the global supply chain as many parts of the world remain unvaccinated and vulnerable.
- There is less variety of available goods for the holiday season in 2021 because of supply chain issues.
- Inflation and the pandemic are not going away anytime soon and will continue to impact the flow of goods and services.
- Some bottlenecks have eased but could only be a temporary seasonal event as shipping slows during the winter months.
Profits are a problem when companies cannot deliver consumer goods
- Supply chain issues continue to choke company profits.
- Many companies are issuing earnings warnings.
- Transportation costs are at the highest levels in years - Logistical and employment costs are high.
- The employment picture is improving, but not to the level that the market had hoped - Companies have to pay more for less productivity.
Higher taxes and interest rates are on the horizon
- The Biden administration will increase corporate and some individual taxes in 2022.
- Chairman Powell told Congress he favors accelerating QE tapering last week.
- A quicker end to QE hastens the liftoff from a zero percent Fed Funds rate.
- Higher interest rates make funding the debt a lot more expensive. At $30 trillion, each twenty-five-basis point hike costs a cool $75 billion annually.
It was not a question of if, but when a correction would occur
- All the leading stock market indices fell last week, closing at or near the recent lows.
- Crude oil took an elevator shift lower after OPEC+ decided to taper cuts by 400,000 bpd in January.
- Cryptocurrencies declined while bonds rallied in flight to quality buying.
- Gravity hit markets starting on November 26 and continued through December 3.
Follow those trends - Picking bottoms or tops is a dangerous game
- When they move, markets tend to rise or fall to levels that defy logic, reason, or rational analysis.
- Picking highs or lows has everything to do with ego and nothing to do with profits.
- The trends are always your best friends in markets as they reflect the crowd’s wisdom.
- Follow the crowd and trends over the coming days and weeks. The path of least resistance of markets is a function of collective wisdom.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!