Overview: Stocks were mixed across the globe last week as volatility continues in the markets. The U.S. stocks turned around a three-week losing streak, with the S&P 500 closing up 0.8%, while international developed stocks (MSCI EAFE) and emerging markets (MSCI EM) fell 3.6% and 4.3% respectively. International stocks were driven lower by a variety of factors, including ongoing COVID-19 concerns, mixed economic data, and elevated tensions in Ukraine leading to concerns over an energy crisis in Europe. Oil prices moved higher last week, with geopolitical tensions in Eastern Europe and the Middle East adding to concerns about energy supply meeting demand. The benchmark WTI crude oil finished the week at $86.82 / barrel, up more than $11 / barrel since the beginning of the year 2022. In bonds, interest rates rose on a clear signal from the Federal Reserve that they will begin raising short-term rates in March (see commentary in the next section), with the 2-year Treasury rising in yield to 1.17%, up from 0.73% at the start of the year.
Economic News: The U.S. gross domestic product (GDP) rose 6.9% on an annualized basis for the fourth quarter of 2021, above consensus expectations of 5.5%. GDP rose 5.7% for the full year 2021, the first time that it has exceeded 3% since the great recession of 2008-09. Above trend, growth is expected to continue this year with GDP expected to be in the 3.5% range for 2022. The Fed’s preferred inflation measure, the core personal consumption (PCE) index, rose at an annualized rate of 4.9% in December, above expectations of 4.8%. This week’s focus will be on the key earnings from companies including Amazon, Alphabet (Google), Meta (Facebook), General Motors, and UPS. Employment data will be in the spotlight on Friday, where the monthly jobs report will offer an updated look at the strength of the labor markets. Economists expect nonfarm payrolls to increase 200,000 (from 199,000) last month, with the unemployment rate to remain unchanged at 3.9%.
Federal Reserve update: (from JP Morgan) Last week, the FOMC affirmed their shift towards hawkishness with a clear signal that they will lift rates at their next meeting and messaging that highlighted a strong labor market and a pressing need to combat inflation by tightening. The Fed’s perspective on the labor market has notably changed over the last few months, from citing the need for easy conditions to support the labor market in the fall, to sharing that most FOMC participants now view labor market conditions as consistent with maximum employment. While the labor force participation rate remains at 61.8%, below pre-pandemic levels of 63.1%, it seems that the Fed is catching on to the idea that participation is unlikely to improve significantly from here. The labor force participation rate is the percentage of the population aged 16 and older that is either working or actively looking for a job, and this rate had been declining long before the pandemic. With the aging of baby boomers, the working population has skewed much older. The population that is aged 55+ accounted for 27% of the population in 1997. Today, it makes up 37%. As we show on the chart, this demographic shift explains much of the secular downtrend in participation over the last 25 years. Add on the pandemic effects, and it seems that the wave of retirements we saw over the last two years has actually allowed participation to correct to its aging trend.
The economy is also seeing an unusually low number of immigrant workers due to the pandemic and tighter immigration policies in recent years. With a structurally smaller labor force, the current low unemployment rate of 3.9% clearly is indicative of a tight labor market that may already be at full employment. The Fed seems to have come to this conclusion, and while we may see some weakness in January’s employment report due to Omicron, it’s clear they feel the implications of a tight labor market for wages and inflation have raised the urgency to begin tightening policy.
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Bloomberg
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