Monday Morning Coffee: Wall Street Closes High On New Year's Eve

Posted by Steve Graham on 1/3/22 7:00 AM

Wall Street closed near record highs in light trading on Friday, the last trading day of 2021, marking the second year of recovery from the global pandemic. All three stock indexes scored monthly, quarterly and annual gains, notching the biggest three-year advance since 1999. The Dow Jones Industrial Average fell 59.78 points or 0.16% to 36,338,3. The &P 500 lost 12.55 points, or 0.16% to 4,766.18 and the Nasdaq Composite dropped 96.59 points, or 0.61% to 15,644. For the year, The Dow was up 18.73%, the S&P 500 was up 27% and the Nasdaq Composite gained 21.4%. companies, consumers, and the broader economy largely thrived in 2032 as they felt their way forward amid a changing landscape, including a tumultuous transfer of power marked by the Jan. 6 Capital riot. Other factors included a labor shortage, generous fiscal/monetary stimulus, hobbled supply chains, and price spikes. Earnings from the S&P companies blew past expectations. Dow transports, considered by many to be a barometer of economic health, registered a gain of 31% for the year. COVID is still here but early data suggests that the Omicron won’t be as deadly as the past versions. Still, interest rates will be going up in 2022 and inflation is a problem and expectations suggest the economy will slow. This will affect financial markets in 2022.

Economic data has been light as the holiday season draws to a close. Some of the issues that shaped 2021, will have a big impact on 2022. Inflation is currently hot but will cool as the supply chain troubles start to ease. 2021 was a story of two haves that had a different story to tell. The first half of 2021 saw a strong expansion of the economy and strong employment growth. However, this growth spurt was largely driven by fiscal and monetary stimulus. Minus the stimulus checks, the economy slowed significantly in the third quarter. Financial markets had a great 2021, but interest rates will be on the increase in 2022. The tightening labor market and strengthening economy pushed the Fed to announce that it would end its pandemic bond purchases program in March. That will open the door for three quarter-point rate increase for 2022. The increased costs of borrowing for businesses and consumers will slow spending, and help cool demand for goods, which will allow supply chains to catch up and take away much of inflation’s fuel.

At present, companies are still battling the supply chain disruptions due to the pandemic, there is a new frightening stage as Omicron cases surge across the globe. The possibility of a faster spread and renewed restrictions have loomed large in many countries. Slower growth in economic activity means weaker corporate profits and likely a slower growth in the financial markets for 2022, compared to last year. Fed policymakers have forecast that inflation will run at 2.6% next year, above the 2.42% rate they projected in September. The increase in Omicron cares suggests that the efforts to shape up the supply chains and shift spending back towards services will take longer than expected. Consumption has held up pre well despite the surge in prices. One of the reasons the consumer has kept up the stiff-upper-lip is that incomes growth has been strong. Until recently, income growth has outpaced inflation, but not in November and this dynamic will likely break down in the next few months. Unless inflation starts to peak and weaken, the consumer might start to curb spending. We project that inflation will peak in the first half of 2022. COVID and inflation are the consumer’s biggest fears and how that plays out will determine 2022.

This week will be busy with economic data, we get a look at construction spending, both the ISM indexes for manufacturing and services. U.S. vehicle sales, trade balance, factory orders, and employment. The economy has good momentum and will enjoy decent employment growth, strong consumption and there will be progress on supply chains and inflation will peak and cool. Last year, we also thought the supply chain problems would sort themselves out and that inflation might run just a little bit hot before starting to cool. Now, the Fed is getting their guns out and ready to move. They are painfully aware of the consequences of inaction. COVID will still have a large voice in the global and U.S. economies this year. We are in better shape to handle outbreaks without wrecking the economy. The U.S. should be able to weather any storms and glide into its long-term trend. However, the nature of downside risks changed in 2021 and likely will change in 2022.

Tags: Economy, Monday Coffee

Latest Data

The U.S. Economy:

The U.S. trade deficit in goods mushroomed to the widest ever in November’s imports of consumer goods shot to a record high ahead of the second straight COVID-impacted shopping season. Industrial supply imports also put in some impressive numbers. Exports slipped after a historic advance the month before. The goods trade deficit increased by 17.5% to $97.8 billion in November from $93.2 billion in October. Imports rose by 4.7%, with industrial supplies leading the way with an increase of 5.7 billion, followed by consumer goods rising by $2.9 billion to come in just shy of $67 billion as retailers rushed to fill shelves ahead of Christmas. Goods exports declined 2.7%, with weakness across the board outside of a 4.3% increase in food exports. The goods trade gap is likely to remain high, as long as the coronavirus pandemic continues. The emergence and spread of the Omicron variant will limit American spending on services and will restoke demand for imported goods.

Wholesale inventories grew again in November, rising 1.2% after a 2.5% jump in October. The inventory rebuild remains a crucial component of GDP growth. November’s advance was driven by durable goods stockpiles, which grew 2% from October. Nondurable inventories ticked up 0.1%. Retail inventories grew 2% in November. Much of the gain came from the auto and parts sector. In total, motor vehicles and parts inventories were up 21.4% above year-earlier levels but advanced 4.2% from October to4 November. Except for the auto sector, retail inventories edged up 1.3%, the latest in a string of record-high readings.

New home sales surged to a seven-month high in November, boosted by an acute shortage of previously owned homes on the market. However, high prices are an obstacle for first-time buyers. New home sales increased 12.4% to a seasonally adjusted annual pace of 744,000 units in November, the highest reading since April. October’s sales [ace were revised to 662,000 from the previously reported 745,000 units. Sales were led by the South and in the West and Northwest but fell in the Midwest. Sales were down 14.0% in November from a year earlier. They peaked at 993,000 units in January, which was the highest since 2006. Inventories fell to an eight-month low in November. It would take 6.5 months to clear the inventories at November's sales pace, down from 7.1 months in October.


China’s factory activity unexpectedly accelerated in December, but only by a slim margin. The official manufacturing PMI rose to 50.3 in December, up from 50.1 in November. The world’s second-largest economy lost some steam since last summer after rebounding from the pandemic slump in 2020. The country has seen a slowing manufacturing sector, debt problems in the nation’s property sector, carbon-emission curbs, and delays from COVID outbreaks. December’s data showed that new orders improved to 49.7 versus 49.4 in November but remained in a negative state. New export orders came in at 48.1, compared to 48.5 in November. Production came in at 51.4, but off from November’s 52.0 reading. Next year, China will face difficulties in trade, as production capacity in other countries recover from the pandemic and compete with China’s products. The official PMI, which included manufacturing and services stood at 52.2, unchanged from November. The economy grew 4.9% in the third quarter but likely slowed in the fourth quarter.

Important Data Releases This Week

  • The November construction spending report will be released on Monday, January 3 at 10:00 AM. For most of 2021, construction spending was led by advances in the single-family sector. However, in the November report, nonresidential construction started to wake up and the single-family sector remains healthy. Construction spending will advance 0.6% in November.
  • The December ISM manufacturing report will be released on Tuesday, January 4 at 10:00 AM. Conditions for manufacturing remain solid and would be stronger if the supply chains would ramp up more quickly. The index for November stood at 61.1 and we look for a small backtrack to 60.5 for December.
  • The December U.S. vehicle sales report will be released on Tuesday, January 4 at various times. Vehicle sales have been weak, held back by supply chain performance. November’s sales came in at a seasonal adjusted annual pace of 12.86 million. December’s sales should move to 13.45 million units.
  • The November trade balance report will be released on Thursday, January 6 at 8:30 AM. The already released goods trade deficit made a jump in November. The goods trade deficit increased by 17.5% to $97.8 billion in November from $93.2 billion in October. Imports made a big jump as companies struggle to fill shelves ahead of the holidays. Goods exports declined 2.7%, with weakness across the board. The goods trade gap is likely to remain high as long as the coronavirus pandemic continues. The emergence and spread of the Omicron variant will limit American spending on services and will restoke demand for imported goods.
  • The November factory order report will be released on Thursday, January 6 at 10:00 AM. Factory orders have been decent, but the headline number has been held back by weak Boeing orders, although they did rebound in October. Factory orders are projected to increase 0.9% for November.
  • The ISM services index will be released on Thursday, January 6 at 10:00 AM. The service economy is rebounding and doing well. The index stood at 69.1 in November will drop to 67.1 in December.
  • The December payrolls report will be released on Friday, January 7, at 8:30 AM. Payrolls weakened in November, by rising by only 250,000. We project a rebound to 475,000 for December. The unemployment rate will be unchanged at 4.2%.






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