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The Fred Policy Pivot Quickens

The markets continued to churn this week first higher, than lower.  There is neither traction to the upside nor downside, as news stories, thin trading volumes, and mixed economic data continue to whipsaw investors. At this point, I think we can anticipate that the remainder of December will finish much like it started.  That said, a lot of year end positioning is happening now, which will set portfolios up for the new year.  Additionally, tax loss harvesting remains one of the final acts investors take which can also contribute to volatility.  With only nine trading days left, this year is wrapping up fast.

The big news this week was the announcement by the Federal Reserve that it is speeding up its bond taper program which began just this month.  This move is its most hawkish policy pivot in years as it looks to put a lid on inflation.  The pace of tapering will be doubled to $30 billion per month, with further reductions coming next year.  Additionally, interest rate projections were updated to show a median forecast of three interest rate hikes in 2022 with an 85% probability of the first occurring by June.  This begs the question, why did the markets go up on this news?  First of all, the market loves certainty.  Knowing what to expect on the macroeconomic level next year goes a long way for investors, as well as an assurance from the Fed that it is taking inflation seriously.  Powell also balanced his rate outlook with a strong dose of optimism about demand and income, and confirmed that the economy is well on track to reaching full employment.  It was this reassurance that the Fed has things under control which put the market, and by extension, investors at ease.

In other news, Democrats had hoped to wrap up their $2 trillion social spending bill by the end of the year, but those efforts are faltering.  The “human infrastructure” package would cover areas like education, healthcare, and climate change, and would need the support of all 50 members of the Senate Democratic caucus to pass.  However, several key members of the Senate believe the budget gimmicks hide the true cost of the bill which the Congressional Budget Office (CBO) estimates will increase the national debt by $2.75 trillion.  The projection was made upon the assumption that the temporary features of the bill would be made permanent later.  Aside from this, the other areas that remain at issue are the expanded child tax credit and some of the climate change provisions.  It is unlikely a resolution will be found before the end of the year.

And finally, I know I’ve brought this up before but it is worth mentioning again.  This has been anything but a “normal” year or a “normal” market.  I came across another piece this week which highlighted just how strange a year it’s been.  Just five stocks account for 33% of the S&P 500 return this year.  In fact, those same five stocks accounted for 51% of the S&P 500 gains since the end of April.  Fortunately for us, we own three or four of those companies, depending on which model you’re in.  However, it does speak to the lack of breadth of return this year.  Furthermore, the market-cap weight of the ten largest stocks in the index has increased for each of the past seven years and now registers at 31%, the highest level since at least 1980.  There isn’t only one reason for this shift.  To some extent it is social media and the Internet which has focused investors on a handful of companies.  Additionally, the advent of commission free trading contributes to the day-trading mentality that permeates the markets these days.  While I’d like to say that things will eventually return to “normal,” I am beginning to grudgingly accept that things are simply different now.

In closing, I turn to a story which came out earlier this year.  Considering the holidays and gift giving, I wanted to give you a few last-minute ideas for that special loved one.  For the person who has it all, I suggest sneakers.  With all the extra disposable income that is seemingly burning holes in peoples’ pockets, there is something for everyone.  A pair of prototype Nike sneakers called the Air Yeezy sold for $1.8 million at Sotheby’s this year.  If that doesn’t float your boat, how about a used pair?  A pair of Michael Jordan’s Nike Air Ships sold for $1.47 million this year.  Among the list are other sneakers worn by Michael Jordan, which apparently are quite popular if you have $500K or more to spend and don’t mind the wear and tear.  There are other more affordable sneakers beginning at just $4,500 in case you were wondering.  As for me, I’m going to stick with my old pair of pedestrian Nike’s which have taken me on many an adventure and have become a well-worn friend.  Now you know.

Bruce J. Mason, MBA