Equities Rebound Despite Inflation
All three indexes finished higher in December with the S&P 500 up 4.5% and the Dow up 5.5% outperforming the tech-heavy Nasdaq up 0.8%. For 2021, the S&P 500 rose 26.9%, notching a three-year winning streak, while the Dow and Nasdaq gained 18.7% and 21.4%, respectively. Energy and real estate were the best-performing sectors in the S&P 500 in 2021, both surging more than 40%, followed by tech and financials, each rising more than 30%.
The market was volatile in the first half of December as investors weighed the impact of the Omicron variant on the global economy. However, earlier concerns were eased on signs that Omicron might not be as disruptive as initially feared. Both Moderna and Pfizer released data showing that their booster shots are effective in preventing severe infection against the new variant. Further evidence also emerged that Omicron typically results in relatively mild symptoms compared with earlier variants. While lockdowns and restrictions are imposed in some European countries, we do not anticipate major shutdowns or lockdowns in the U.S. In our view, Omicron will partially delay the global economic recovery but will not prevent it.
Inflation remained elevated in November, with the headline CPI up 6.8%, the largest gain since the early 1980s. Meanwhile, the PPI was up 0.8% in November, more than the economists’ consensus anticipated. Although rising energy prices and supply-chain issues were two major driving factors behind the recent price surge, the Fed has certainly felt the pressure to address inflation. While we acknowledge that the inflation risks are to the upside in the coming months, we anticipate that prices will begin to moderate in the second half of 2022 as the supply chain issues gradually dissipate. Anticipated higher productivity in this business cycle should also help businesses absorb higher wage costs, dampening the effect of inflationary pressures.
Still, ongoing inflationary challenges and the tightening labor market have pushed the Fed to formalize the hawkish shift in its monetary policy. In its December meeting, the Federal Open Market Committee (FOMC) announced plans to double its pace of tapering from 15bn USD to 30bn USD per month beginning in January. Furthermore, the expected timeline of rate hikes was pulled forward: the median voting member now expects three hikes this year and in 2023, in sharp contrast to the forecast from its September meeting when only one hike in 2022 was anticipated. As such, we expect the Fed to kick off rate hikes this month, but also expect the effect will be gradual and relatively modest, amid the backdrops of slower but above-trend growth, peaking inflation, and virus uncertainty.
2021 has been a year of remarkable economic recovery and extraordinary equity return, and we see 2022 heralding a new regime of moderation—particularly in terms of growth, inflation, and asset returns. We anticipate volatility down the road but believe that above-trend growth, negative real yields, robust business investment, and accumulating U.S. household savings will be supportive for risky assets.
By the Numbers (Year-to-Date)*
U.S. Equities (S&P 500 Index) | 28.2%
International Equities (MSCI ACWI ex-U.S.) | 7.8%
U.S. Bonds (Barclays U.S. Aggregate Bond Index) | -1.5%
Global Bonds (JP Morgan Global Aggregate Bond Index) | -4.7%
The NorthCoast Navigator is a market "barometer" displaying NorthCoast's current U.S. equity outlook. This aggregate metric is determined by multiple data points across four broad market-moving dimensions: Technical, Sentiment, Macroeconomic, and Valuation. The daily result determines equity exposure in our tactical strategies.
As of 12/31/2022. Data provided by Bloomberg, NorthCoast Asset Management.
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Valuation The S&P 500 rose 4.5% in December, and equity valuations remained under pressure. P/E increased from 25.03 in November to 26.21 in December; Forward P/E increased from 21.8 to 22.8. With inflation rising, inflation-adjusted valuation measures remained negative.
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Sentiment The PMI index increased from 60.8 to 61.1 in November, with supplier deliveries falling from 75.6 to 72.2, indicating a gradual alleviation of supply-chain difficulties. Despite the persistent burden of high infection rates and rising energy prices, consumer confidence in the U.S. climbed in December, according to reports from the Conference Board Consumer and the University of Michigan. The consumer confidence index of the Conference Board increased from 111.9 in November to 115.8 in December. The University of Michigan's sentiment index increased 3.2 points to 70.6, up from 67.4 in November. |
Technical Technical indicators remained optimistic but strained. The VIX level settled at 16.3 at the end of December, compared with 27.2 at the end of November. Fears over Omicron caused a rise in volatility at the start of the month. The market was calmed by signs that the Omicron might not be as disruptive as initially feared, as well as the year-end holiday influence. |
Macroeconomic The U.S. labor market continued to tighten, with the four-week moving average of new unemployment claims falling from 206,500 to 199,250. Inflation remained high, with the headline CPI rising 6.8%, the highest level since the early 1980s. Meanwhile, the PPI increased by 0.8 percent in November, above expectations. After a healthy gain of 1.7 percent in October, industrial production in the U.S increased by 0.5% in November. With modest indicators that supply-chain concerns are no longer escalating, the picture is improving.
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1 Source: Bloomberg, WSJ, NorthCoast Asset Management. NorthCoast Asset Management is a d/b/a of, and investment advisory services are offered through, Connectus Wealth, LLC, an investment adviser registered with the United States Securities and Exchange Commission (SEC). Registration with the SEC or any state securities authority does not imply a certain level of skill or training. More information about Connectus can be found at www.connectuswealth.com. The information contained herein has been prepared by NorthCoast Asset Management (“NorthCoast”) on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. NorthCoast has not sought to independently verify information obtained from public and third-party sources and makes no representations or warranties as to accuracy, completeness, or reliability of such information. All opinions and views constitute judgments as of the date of writing without regard to the date on which the reader may receive or access the information and are subject to change at any time without notice and with no obligation to update. This material is for informational and illustrative purposes only and is intended solely for the information of those to whom it is distributed by NorthCoast. No part of this material may be reproduced or retransmitted in any manner without the prior written permission of NorthCoast. NorthCoast does not represent, warrant or guarantee that this information is suitable for any investment purpose, and it should not be used as a basis for investment decisions. © 2020 NorthCoast Asset Management. PAST PERFORMANCE DOES NOT GUARANTEE OR INDICATE FUTURE RESULTS. This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or investment products or to adopt any investment strategy. The reader should not assume that any investments in companies, securities, sectors, strategies and/or markets identified or described herein were or will be profitable and no representation is made that any investor will or is likely to achieve results comparable to those shown or will make any profit or will be able to avoid incurring substantial losses. Performance differences for certain investors may occur due to various factors, including timing of investment. Investment return will fluctuate and may be volatile, especially over short time horizons. INVESTING ENTAILS RISKS, INCLUDING POSSIBLE LOSS OF SOME OR ALL OF AN INVESTMENT. The investment views and market opinions/analyses expressed herein may not reflect those of NorthCoast as a whole and different views may be expressed based on different investment styles, objectives, views, or philosophies. To the extent that these materials contain statements about the future, such statements are forward looking and subject to a number of risks and uncertainties. |