Despite the high inflation numbers and the Fed’s moves to address them, the slowdown in consumer spending in November, and expectations that COVID numbers will spike in January due to how transmittable the new Omicron variant is, the market is motoring higher. The linchpin is that Omicron is now expected to result in much fewer hospitalizations per person infected, and hence no lockdowns are expected in the US. Optimists see this high infection rate with low severity as the beginning of the end of the pandemic.
I expect supply chain problems will persist but ultimately ease inflation pressures, and 2022 will be the real reopening year with travel and entertainment returning towards pre-pandemic levels, supporting earnings and GDP growth. Inflation may take a couple of quarters to come back down to earth, and interest rates are likely to rise modestly as the Fed ends quantitative easing and starts to increase Fed funds above zero, but this should not slow down funds flows into stocks in 2022.
I expect the indexes to end the year at or near new all-time highs with continued strength as the year begins, tempered by fears about the unavoidable spike in COVID infections. If COVID fades materially by the end of the 1st quarter, that should drive positive sentiment for probably the balance of the year in an extended relief rally.
Durable Goods Up
The only “glitch” in the November durable goods report-which was up 2.5%-was that business orders declined 0.1% after rising 0.9% in October. Perhaps businesses were more cautious since inventories rose 0.6% in November. However, unfilled orders for manufactured goods rose 0.7% in November, which bodes well for continued strong, durable goods orders in the upcoming months. As a result, I expect many economists may revise their fourth-quarter GDP estimates higher.