The market finally gained certainty last week when the Federal Reserve officially announced that it is shifting its policy approach. Through March, it will expand its monthly taper to $30 billion a month from $15 billion; based on guidance from committee members, we can expect three rate increases in 2022.
Despite the more hawkish tone, remember that for the next three months, it's just a taper, which means the Fed will still be in the market buying until March. This will add more liquidity to an already flush system, so it won't make much of a dent in near-term inflation levels.
Though omicron is spreading rapidly, we received promising news last week that the Pfizer and Moderna vaccines are effective against multiple variants; so far, vaccinated people are coping well with the virus. We will be watching economic indicators closely to see how the omicron spike impacts consumer demand and overall economic activity.
Despite inflation and COVID uncertainty, consumers continue to spend on goods and services. The Institute for Supply Management is reporting robust new orders, and demand for services is at record highs. These are strong indicators that we will see a much higher Q4 GDP number compared with Q3. In the new year, GDP growth will likely slow but stay above trend in the 4% range.
With much uncertainty heading into 2022 around inflation, interest rates, persistent supply chain issues and COVID, I'm staying diversified in my equity portfolio, favoring cyclical, economically sensitive companies while maintaining holdings in select growth companies with large total addressable markets.
Consumer Demand Remains Strong
Since consumer spending accounts for 69% of GDP, this is an important driver of economic growth. U.S. retail and food services sales rose 18.2% in November versus the same month last year, though November sales slowed markedly compared with October — likely due to the fact that many consumers did their holiday shopping early due to concerns about inflation and product shortages.
Consumers with pandemic fatigue are spending money on services as they hunger for experiences such as travel and eating in restaurants. This is likely to continue, as we still have pent-up demand, with $2 trillion in consumer savings and $4 trillion in money market accounts, according to Merion Capital.
Consumers continue to be bolstered by plentiful jobs and higher wages. Total nonfarm payroll employment rose by 210,000 in November, and the unemployment rate fell by 0.4 percentage point to 4.2%. As of end-October, the U.S. had a whopping 11 million job openings, according to the latest Job Openings and Labor Turnover Survey (JOLTS).
With abundant jobs to choose from, national quit rates are still high, meaning workers feel confident they can leave their jobs and find new employment easily. At the same time, wages are increasing: U.S. nonfarm unit labor costs swelled by 9.6% in Q3.
Inflation continues to surge for both consumers and businesses amid ongoing supply chain challenges. The U.S. consumer price index rose 6.8 percent for the 12 months ending November, the largest 12-month increase since the period ending June 1982. And the PPI rose 9.6% year-over-year in November, the largest advance since 12-month calculations began in 2010; it rose 0.8% month on month.
