December 19, 2021



                                 Week Ended December 17th, 2021

• What a difference a week makes.  Stocks pulled back sharply with large cap tech taking the biggest hit as the conclusion of the meeting of the Open Market Committee (FOMC) of the Federal Reserve revealed a seemingly more hawkish Fed, a stance that the bond market reacted to with skepticism as the yield curve flattened, historically a sign of a slowing economy.  We believe the Fed may have become an inflation hawk at precisely the wrong time.

• Again, what a difference a week makes which prompts us to once again remind our clients that investors, like all people, have the tendency to draw definitive conclusions from data or events that they believe will alter the trajectory of the financial markets.  Furthermore, most of their time is spent trying to identify those issues that will help them skirt downturns in their portfolio.  If the last couple of years has taught us anything, it is that market soothsaying is an impossible task and that it is best to hitch your financial wagon to the assets in percentages that historically will help you reach your long-term objectives.  For most investors, these asset classes include equities, bonds, publicly traded real estate trusts and to a much lesser small extent, cash.  At Fagan Associates, together with each client, we establish a range of percentages in each of the above asset classes that conforms to the long-term needs of the client and when necessary, work at the periphery tweaking those percentages in response to fluctuations in the market or when the specific needs of the client change.  If history has taught us anything, there is no better way.  There is no magic bullet.

• Despite the much ballyhooed pace of economic growth, the recession resistant Telecom, Health Care and Utility Sectors all rose, this despite a down market.  In fact, the Dow Jones Utility Average (^DJU) is within striking distance of an all-time high.  The performance of these sectors suggests a slowing economy.

Within the release following the meeting of the FOMC noted above were several statements that provided a clear picture of the Fed’s opinion of the current state of the U.S. economy as well as concerns going forward.  Specifically, “with progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen.  The sectors most adversely affected by the pandemic have improved in recent months, but continue to be affected by COVID-19.  Job gains have been solid in recent months, and the unemployment rate has declined substantially.”

It is important to note that the statement highlighted and italicized immediately above replaced “job gains have been solid in recent months, and the unemployment rate has slowed their recovery.  Inflation is elevated, largely reflecting factors that are expected to be transitory.”

• Hopefully, someday FOMC Meetings won’t matter.  However, right now it is all about how the Fed navigates its way through these unprecedented times.

• As read in Barron’s, according to J.P. Morgan Strategist Marko Kolanovic, “while the broad-market Russell 3000 is up about 21% in 2021, the average U.S. stock is down 28% from its highs, suggesting a massive amount of weakness under the surface.”  Quoting directly from Kolanovic, “such a divergence is unknown to us, and indicates a historically unprecedented overshoot in selling smaller, more volatile, typically value and cyclical stocks in the last four weeks.  The narrative for the selling is related to Omicron and the Fed, while actual selling comes largely from de-risking and shorting from equity and macro hedge funds.”

• Quantifying investor behavior is difficult, if not possible.  That is an additional reason to allocate your assets according to your long-term objectives and let the short-term take care of itself.

• Beware of year-end machinations in the stock market as both professional and retail investors alike are realizing losses to offset any previously realized capital gains.  This results in heightened volatility, but potential opportunity for some companies.

• If the balance of power in the labor market continues to favor the employee as opposed to the employer, expect continued growth in wages which we view as positive for the stock market and America as a whole as well as more of a battle surrounding the areas of the environment, social responsibility and governance (ESG).

• Some of the most well-known names in the industry, specifically Paul Tudor Jones, David Einhorn, and Carl Icahn believe that inflation may be here to stay a bit longer than the Fed has stated they anticipate, in large part due to the large stimulus package as well as the structural issues impacting production, logistics and labor as a result of the pandemic.  We agree to a certain extent and are watching this closely.  However, we will also remind investors that at some point in the not too distant future, the disinflationary impact of technology will again take hold, dampening inflation.

• The Federal Reserve through the U.S. Treasury Department continues to exercise traditional measures in attempting to navigate an economic rebound by pushing dollars/stimulus into the economy.  Will this work?  We believe so.  However, keep in mind that historically recessions have been brought about by a lack of consumer demand.  This past one was different as it was intentionally created in response to the health crisis.  Perhaps there has been too much unnecessary stimulus trying to create demand that was going to be there anyways as the United States emerged from the pandemic.  For now, just a thought.

• The upcoming week is chock-full of economic releases.  On Monday, the Index of Leading Economic Indicators will be released by the Conference Board; on Wednesday the final reading on Third Quarter Gross Domestic Product (GDP, Consumer Confidence and Existing Home Sales; on Thursday, Initial Claims for Unemployment Benefits, Personal Income and Spending, New Home Sales and the University of Michigan’s Final Reading on December Consumer Sentiment.

• The corporate earnings season has wound down.  However, some potentially market moving companies are reporting.  They include – Nike (NKE), Micron Technology (MU), Carnival, PLC (CUK), H&R Block (HRB), General Mills (GIS), Carmax, Inc. (KMX), Cintas (CTAS), Paychex (PAYX) and CRH, PLC (CRH).


o Investing is about staying within your asset allocation model as the short-term is IMPOSSIBLE to predict whereas the direction of the equity markets over the long haul is VERY PREDICTABLE.  Successful investing requires the ability to harness your inclination to respond by selling during times of market stress.

o Stock prices do not move in a linear fashion.  If they did they would provide returns similar to that of your bank account rather than their historic annualized 8%-10%.  Short-term moves in both directions are unpredictable.  Did you really think that after a 60% move off the bottom in March, there wouldn’t be a correction?

o We love the statement within an article written by Mike Santoli for CNBC who observes that it is “always worth recalling Peter Lynch’s line that more money is forgone by people anticipating corrections than is lost in corrections themselves.”

o From the perspective of the client it is nearly as uncomfortable and for them even “irrational” to sell or rebalance during a bull market as it is to buy during a bear market.

o It is important to keep in mind that there is quite often a disconnect between current economic activity and the stock market as the latter is a mechanism that discounts economic growth up to twelve months in advance.

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