A strong finish for stocks in December capped off another rewarding year for investors, despite ongoing challenges from the pandemic as well as new concerns related to inflation. The S&P 500 benchmark of U.S. stocks led most major indices with a return of 28% for the year, while international equities and other segments of the market also delivered double digit rates of growth. In the face of this pandemic, strong global financial markets can be attributed to our collective ability to adapt, the broad distribution of vaccines, as well as the stimulative fiscal and monetary policies that have been well coordinated.
The U.S. consumer continued to show resilience during the year by increasing their holiday spending in December at the fastest pace in seventeen years. Consequently, this rate of consumption should lead to at least 4% GDP growth in the recently concluded quarter. However, other signs in the economy are mixed, including the December employment report that showed 199,000 jobs created in the month – well below expectations. This lackluster employment report is further evidence that businesses are having difficulty hiring and retaining workers as the economy attempts to recover.
With December headline inflation registering at 7%, a forty year high, some economists are implying that the Fed may be behind the curve as it relates to price stability within our economy. While there are many known causes of inflation, economists point to the $3 trillion of emergency pandemic stimulus in 2021 as a catalyst, which in turn boosted household savings and consumer spending. On the business side, companies have dealt with supply chain bottlenecks that have caused low inventory levels, leading to higher prices of goods. Current U.S. inflation has been evident in rising car and energy prices, with buoyant home values reinforcing the trend.
Finally, market volatility has been on the rise as investors face uncertainty from rising interest rates, surging inflation, a less-supportive Federal Reserve Bank, and the fast-spreading Omicron variant. Chair Jay Powell and the Federal Reserve have the daunting task of bringing inflation under control while not slowing down the overall economy. With the Fed tapping the brakes and withdrawing monetary support from the economy, Corporate America, with its capacity to innovate, will be put to the test yet again. Upcoming fourth quarter earnings reports will be heavily scrutinized as the next marking period for financial markets. In this New Year, we will also be tracking debates around legislative packages and other spending programs, as they too can influence asset prices here and abroad.