December’s Stock Market and Real Estate Market Commentary with January’s Outlook

December Recap and January Outlook

When October’s employment number (released in November) far exceeded expectations, there was some concern that the Federal Reserve would continue with their “dovish” stance on inflation believing it was transitory, allowing it to run its course.  With a projected monthly reduction in asset purchases of $15 billion in July, the expectation became there would be a singular rate increase during the second half of 2021.

What a difference the data can make.

After the November employment number came up short and inflation continued to reach heights not seen since the 1980s, the Fed sharply reversed course, and their dovish outlook became hawkish. The tapering schedule was shortened drastically, making space for two additional rate increases now expected in 2022.

Let’s Look at Some Highlights

An Unhappy Employment Surprise

Total non-farm payroll employment rose by 210,000 in November. This is less than half of the Dow Jones estimate of 573,000 new jobs. The most impacted sectors were retail, which was down 20,000, and leisure and hospitality, which was essentially flat after adding significantly to payrolls earlier this year. Several sectors that were less affected by COVID variants, including professional and business services, construction, and manufacturing, all saw increases over the month.

There was some good news: The household survey showed that the unemployment rate dropped to 4.2%. The labor force participation rate increased to 61.8%, the highest level since March 2020.

The Fed Acted Decisively on Tapering and Rate Increases

The program was projected to end in June and will now end in March, with bond purchases reduced by $30 billion per month, double the initial rate of tapering. The Fed is now signaling three rate increases in 2022, three in 2023, and two in 2024. This has the potential to put the short-term rate at just over 2% by the end of 2024.

The Fed prefers PCE (Personal Consumption Expenditures, or monthly changes in price to consumer goods and services) to measure inflation, not the more familiar CPI (Consumer Price Index). The expectation for PCE was increased from 2.2% to 2.6% for 2022.

Growth Prospects Have Moderated, But Businesses Remain Optimistic

The Conference Board (TCB) announced growth estimates for 4Q 2021. It forecasts U.S. Real GDP growth will rise to 6.5 % (annualized) in Q4 2021 and that 2021 annual growth will come in at 5.6% year-over-year. The 2022 forecast is that economy will grow by 3.5 percent year-over-year, indicating slowing momentum. TCB cited persistently high inflation and a more hawkish Federal Reserve creating headwinds. “Prolonged inflation will eat away at consumer purchasing power over the coming year, and tighter monetary policy will raise borrowing costs.”

However, the Institute for Supply Management (ISM) Survey shows positive expectations. ISM reports that 65% of respondents expect higher revenue. Purchasing executives forecast a 6.5% net increase in sales for 2022, compared with a 14.1% increase expected this 2021.

Chart of the Month: GDP Growth Projections

GDP growth is likely to moderate in 2022 before regaining momentum.

Source: TradingEconomics.com, World Bank

Equity Markets

• The S&P 500 was up 4.36% in December bringing its YTD return to 26.89%
• The Dow Jones Industrial Average rose 5.38% for the month and was up 18.73% YTD
• The S&P Mid-Cap 400 increased 4.92% for the month resulting in a 23.21% YTD return
• The S&P Small Cap 600 gained 4.36% in November, putting the YTD return at 25.27%.

Source: All performance as of December 31, 2021; quoted from S&P Dow Jones Indices.

The S&P 500 saw 434 issues gain for the year, with 96 gaining over 50%. All 11 sectors posted double-
digit gains. The index posted 70 new closing highs for the year, ranking second only to 1995 with 77. For the month, 10 of the 11 sectors gained, up from two last month. Consumer Staples was the strongest performer in December, and Consumer Discretionary was the only sector that declined. Volatility for the year was lower than 2020 (not hard to do) but still much higher than pre-pandemic comparisons.

Bond Markets

The 10-year U.S. Treasury ended the month at 1.51%, not even close to the projection of 2% by year-end that we saw last January. The Bloomberg U.S. Aggregate Index was down, returning -0.29%, and finished the year in the red with a return of -1.54%. As represented by the Bloomberg Municipal Bond Index, Municipal bonds returned 0.16% for a year-to-date return of 1.51%. In December, the return to risk assets benefited the Bloomberg U.S. High Yield Index, which turned in 1.87% for the month, bumping the year-to-date return to 5.27%.

Real Estate Markets

Commercial Real Estate

Throughout the country, multiple real estate asset classes saw positive returns. None more, however, than multifamily or apartments. With a limited inventory of single family homes, apartment complexes saw on average 16.1% appreciation over the past year. Secondary markets like Phoenix, AZ saw an incredible 36% in value appreciation. After the rent moratoriums were lifted, land lords pushed rents higher, which led to an astounding 26% increase in rental prices.

With the rise of ecommerce and the need for large warehouses, the industrial sector saw large amounts of appreciation as well. On average, industrial commercial real estate jumped 21.7% in 2021 with the highest growth going into cities like Atlanta and Phoenix.

Office and retail space also posted low double-digit returns.

Single Family Homes

On average, single family housing prices in Southern California shot up by 14% in 2021 compared to 2020. Townhomes and condos appreciated by more than 16%. In Hawaii, single family homes appreciated by more than 25% while the value of townhomes and condos grew by more than 14%.

Conclusion

Getting the year started on the right footing is all about the details.

Credit card applications rose for the year ending in October 2021, as an estimated 27% of U.S. consumers applied for a new or another card, compared with 16% for the prior one-year period. All those new cards with “no interest” introductory periods might not look so appealing when rates increase on newly high balances. With interest rates poised to increase, consumer rates and mortgage rates are likely to follow. A prudent strategy would be to reduce high-interest debt where possible, either by paying it off or consolidating it at lower rates.

As we enter tax season, there’s still time to open an IRA. And with 401(k) contribution limits increasing due to the bump in inflation, you might want to consider putting more away in tax-deferred accounts.

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