The Powell Pivot

Weekly Market Update | December 20, 2021

Highlights

The prospect for tighter central bank monetary policy and mounting Omicron cases caused global equities (as measured by the MSCI AC World index) to shed some of the prior week’s gains – falling by 1.6%. In the U.S., the Dow Jones slipped 1.7% while the interest rate sensitive NASDAQ tumbled 2.9%. The S&P 500 fell 1.9%. Equities outside the U.S. were less impacted with European stocks falling just 0.6% and Japanese stocks rising 0.4%. The 10-year U.S. Treasury yield fell 8 basis points to 1.40%.

Fed Chair Powell delivered a more hawkish message to financial markets by saying that the Fed will accelerate its pace of bond tapering and envisions three rate hikes in 2022. By doubling the tapering pace, the Fed’s bond purchase program will likely come to an end by March 2022. We think that by sending hawkish signals now, the Fed may be eliminating the risk of a larger hawkish surprise in 2022.

The pace of the forthcoming tightening cycle will be important. During the last 10 tightening cycles, the S&P 500 returned an average of 9.2% in the year that followed the first rate hike of “slow” tightening cycles (less than six rate hikes in the first year) and returned just 0.2% during “fast” tightening cycles (more than six rate hikes in the first year). We think a slow tightening cycle is much more likely to occur.

The next Weekly Market Update will be released on January 10, 2022. Happy holidays to all and we wish you the very best year ahead!