The Week Ahead – The Virtuous Cycle

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

I am looking forward to this week as I am heading for a much-needed vacation – my first in nearly four years. Fortunately, I have extremely competent team members that will be able to keep everything on track as I enjoy the tropical sun. This trip was planned well before Omicron, but as I am now triple vaccinated, I trust I will be okay.

Wednesday this week will be pivotal. We expect the Federal Reserved (Fed) to announce a doubling of the pace of tapering, meaning the quantitative easing (QE) program will end in March. Since markets are expecting it, in theory it should be a non-event. In actuality, markets may be volatile depending on Fed Chair Jay Powell’s tone regarding the reaction function around the 6.9% inflation print we witnessed last week. A policy mistake by the Fed is one of the big risks to markets. If the economy grows too quickly pushing up wages and inflation, the Fed may have no choice but to slam on the brakes. However, thus far they have done a good job.

The U.S. stock market just hit another all-time high last week. Consumer net worth is up an unprecedented $39 trillion in less than two years, which leads to increased consumer spending (wealth effect). Increased spending leads to higher corporate revenue and back to higher stock prices – a virtuous cycle of economic growth and prosperity. While the rate of economic growth has certainly peaked, we believe Gross Domestic Product (GDP) will expand at nearly double the pre-pandemic trend rate in 2022. The fundamental backdrop remains extremely strong; perhaps too strong. U.S. jobless claims came in at their lowest level in 52 years. At the current trajectory, we are likely to see 3% unemployment in the next 12 months. This of course means higher wages and inflation. The rate of inflation will come down, but with rents growing at over 5% annualized, the Consumer Price Index will have a lot of upward pressure for the foreseeable future.

I am sure Mr. Powell will cover the higher than expected inflation on Wednesday. Pressures are coming off the boil as supply chain issues are ameliorating, and semi-conductor production is helping meet surging demand for goods. It should be a very interesting week, indeed.

Data deck for December 13–December 17: