Our S&P500 stock market hit an all-time high today with the Dow Jones being close behind. This despite the market’s obsession the past 2 weeks with Omicron-COVID. There are signs our economy could be equally strong in 2022. Current concerns with non-COVID issues of inflation, interest rates, unemployment and gas prices may be shorter term and dissipate as the year progresses.

Omicron-COVID: the newest variant promises to be the most contagious.  Economic projections are being updated to show the effect of Omicron.

Gas prices have dropped the past couple weeks in response to Omicron, and anticipation people will travel less, commute less and significantly reduce demand for fuel as seen in the chart below. Stable/lower gas prices should also calm inflation.

Inflation was the highest it’s been in almost 30 years (remember President Jimmy Carter and rampant inflation, 10% CD’s, gas lines…), as gas cost increases affected everything from energy to food prices. Increased labor prices contributed to inflationary pressures as well.

Interest rates: Our federal bank indicated it will raise interest rates three times next year. This is primarily intended to moderate economic growth and reduce inflation.

Unemployment has plunged this year as our economic growth has created an unexpected number of new jobs. Combined with baby boomers retiring early as covid created a “you only live once” wave. We should see a reduction of baby boomers retiring early and younger employees returning to the workforce. This should moderate wage increases and help stabilize employment cost contributions to inflation.

Supply chain issues will still be with us next year but should be significantly improved. American ingenuity is at work with unloading the container ship backlog at a pace far exceeding “experts” projections.

Federal Debt Ceiling concerns have been resolved for now as congress recently raised the debt ceiling until 2023.

Stimulus: it appears the White House $1.9 trillion stimulus package will not get congressional approval.  This should also reduce economic growth projections/inflation for the upcoming year.

Technology stocks, especially newer and small companies’ have been hit hard with prospects of higher interest rates. The correlation being many of these newer companies need loans to fuel their growth and with higher borrowing costs it will be more expensive to continue their progress.

Taxes: Earlier this year there were discussions around increasing marginal tax rates, capital gains, … As the year progressed with the lack of stimulus spending, momentum behind tax increases has subsided. The exception is eliminating back door Roth’s, which continues to have traction.

Happy Holidays from your Team

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We trust you found this review to be educational and informative. 

 

As always, we are honored and humbled you have given us the opportunity to serve as your financial advisors.

 

Eric & Kelly