In this week’s Steady Investor, we look at three factors and provide our view on how we see them affecting the market in 2022:
The Federal Reserve Makes a Big Announcement – The Federal Reserve wrapped up a two-day meeting on December 15, and with the post-meeting press conference came a largely surprising announcement: market participants should expect interest rate increases in 2022. Fed watchers have known that this mid-December meeting would result in a quickening of the Fed’s ‘tapering’ plans. Fed Chairman Jerome Powell had largely telegraphed the Fed’s goal to unwind the bond and mortgage security purchase program by next March instead of next June, and this plan was confirmed Wednesday by the Fed announcing a reduction of purchases by $30 billion a month instead of $15 billion a month. But the somewhat surprising news came when it was revealed that all 18 Fed officials expected fed funds rate increases next year. And not just one rate increase – three. This policy pivot indicates the Fed has become more concerned with inflation than with the jobs market, which continues to have more job openings than unemployed people actively seeking work. The stock market welcomed the Fed news, at least on the day of the announcement. The S&P 500 rallied over +1% for the day.1
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U.S. Consumers Continue to Ramp Up Purchases – Retail sales rose by 0.8% in November from the previous month, signaling that U.S. consumers have thus far been unfazed by the
Omicron variant and continue spending strongly this holiday season. The 0.8% increase in November marked a slowdown from October’s robust 1.8% rise, but indicates momentum is carrying through the holiday shopping season. Some forecasters are wondering if consumers moved up their purchases to earlier in the season, given worries over inventory availability tied to supply chain issues. That makes December a key month to watch. Compared to a year ago, retail sales rose a stout 18.2% in November, which it should be noted is far higher than the year-over-year rate of inflation (6.8%) posted over the same period.3
U.S. Housing Market Powered by Millennials – The U.S. housing market continues to appreciate at a brisk pace. According to the National Association of Realtors, the median price of an existing home sold in October was approximately $354,000, which is up about 13% from a year ago and nearly marks a record. Home prices across the U.S. have climbed for a record 116 straight months. Where is all the strong demand coming from? Upon analysis of home-purchase loan applications over the last year, the answer is clear: millennials. More than half of all loan applications made in the last year were for people born between 1981 and 1996, with 67% of those applications being for first-time home purchases. The Covid-19 pandemic certainly contributed as well – the catalyzation of remote, work-from-home capabilities spurred many millennials to leave cities for bigger spaces in the suburbs. The wave is seen by some economists as a one-time pull forward of sales that would have otherwise been spread out over many years, but that doesn’t mean millennial demand for homes is likely to abate soon – the largest cohort of millennials just turned 30 in 2021, which is below the median first-time homebuyer age of 33. Prices continue to surge because this demand is not being met with enough supply. According to Freddie Mac, the U.S. housing market was 3.8 million single-family homes short of what would be needed to meet demand.4
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Disclosure