December 12, 2021

Dual Mandate


Bottom Line:


Stock markets reversed course this week and recovered some of the previous two weeks’ losses. Markets have been battling dual negative forces for much of the past month – the latest variant and threat from Covid-19 and persistent inflation, which is forcing a Federal Reserve policy path shift. Fortunately, the very early reports regarding the Omicron variant show mild cases. Unfortunately, but as expected, the latest CPI inflation reported a 39-year high ahead of the December Fed meeting. Let’s review the latest data for each and adjust to the new normal.


The Full Story


It has been clear over the last month that two forces are driving capital market returns: 1) Covid and the path of the newest variant Omicron and 2) Federal Reserve policy and the inputs that drive it – inflation and the labor market. As we outlined last week, markets initially had a risk-off reaction to the Fed’s updated policy path. There was selling, particularly in the most highly valued segments of the equity markets (including cryptocurrency), and movement towards defensive assets and bonds. This week saw markets potentially adjusting to a new normal as the major equity indexes posted positive returns for the first time in four weeks and rallied more than 3%.


Inflation & Fed Prognostications


November Consumer Price Index (CPI) data was released on Friday, and the headlines looked bad:


“U.S. Inflation Hit a 39-Year High in November” – Wall Street Journal

“Consumer prices rose by 6.8 percent in November, as inflation hits highest pace since 1982” – NBC News

“U.S. inflation rate swells to 39-year high of 6.8% as Americans pay higher prices for almost everything” – MarketWatch


However, the headline CPI growth figure met (i.e., did not exceed) consensus expectations by rising 0.8% month-over-month and 6.8% year-over-year. Excluding the more volatile food and energy components, Core CPI still rose rapidly at 0.5% month-over-month and 4.9% year-over-year. As noted in the news headlines, they were the highest CPI inflation figures in more than 30 years.


As for contributors to the price index, energy prices, rising 33.3% year-over-year, were the largest contributor as gas prices continued to soar. Vehicle costs also accelerated, with prices for used cars climbing 31.4% from a year ago. Food costs climbed 6.8% year-to-date, as prices for beef, pork, and other food items were up sharply. Travel and leisure sectors showed recovery from the Delta wave, with airline fares rising 4.7% after declining in recent months and hotel prices recovering by 3.2%. Apparel prices also rose 1.3% after a few months of declines, reflecting higher holiday season demand against strained inventories. Shelter costs rose 0.5% for November as the lagged effect of higher home prices continues to feed into the owner’s equivalent rent component.


While Fed Chair Jerome Powell said that he is ready to retire the word “transitory,” the good news is that most of the largest individual contributors to November CPI increases should be temporarily elevated. Vehicles and energy can be tied to supply issues, and hotel and airfares can be tied to COVID-related reopening. But with prices that have remained elevated for many months and will likely continue to stay high into the first half of 2022, the “transitory” term is probably not the best explanation. Looking forward one year, prices likely will not have declined, but should moderate significantly due to current elevated base levels as well as easing supply chain constraints. Given this, we believe that we are at peak inflation right now from supply chain issues and energy prices.



Friday’s report should reinforce expectations that the Fed will accelerate the tapering of Quantitative Easing at its meeting this next week and potentially raise rates as soon as June 2022. Naturally, some investors fear equity market volatility as the Fed starts to reduce liquidity injections into the system and embarks on a rate-hiking cycle; however, equities historically have held up well during tapering and the start of Fed rate hikes. It is only toward the end of Fed cycles that we tend to get more serious volatility, which is unlikely to be in the next 18 months.


I also think it’s noteworthy that Jerome Powell started his term as Fed Chair in February 2018 and presided over the last cycle of rate hikes including the overtightening and resulting stock market correction during the fourth quarter of 2018. I’m hopeful that lessons were learned.




The Omicron variant of Covid-19 first became a news headline and market concern on the day after Thanksgiving and the following week. The S&P 500 saw its worst 2-day performance in over a year and the Volatility Index rose to above 30 for the first time since February. Also, that same week in testimony before Congress, Fed Chair Jerome Powell suggested that inflation was no longer transitory and that the pace of tapering might be accelerated at the Fed’s December meeting. Both contributed to market stress and the risk-off selling mentioned previously.


Thankfully, Omicron-induced pressure has been slightly easing. On Friday, the CDC released a report on the first studied cases in the U.S. and many of the omicron variant infections appear to be mild. They did note that it was a very small sample size (43 cases), it can take several days or weeks before severe symptoms appear in some individuals, and symptoms would be expected to be milder in infected vaccinated people and in those with a previous coronavirus infection.


The CDC report aligns with similar early reports from South Africa. The South African Medical Research Council reported that most hospitalized patients who tested positive did not need supplemental oxygen, few developed pneumonia, few required high-level care, and few were admitted to intensive care. The average length of hospital stays was below 3 days, compared to 8.5 days over the last 18 months.


BioNTech and Pfizer expect to deliver an Omicron-specific vaccine by March 2022. The companies also reported that in laboratory tests, a three-shot regimen (including the booster) may be just as effective in neutralizing the new Omicron variant as their original two-shot regimen was in neutralizing Alpha.


While it seems highly unlikely that we were ever headed back into a lockdown, social distancing restrictions impacting hospitality, leisure, food & beverage, and entertainment industries as well as the availability of workers all have real economic impacts.



Have a great Sunday!



Timothy W. Ellis, Jr., CPA/PFS, CFP®

Senior Investment Strategist, Wealth Strategist





Sources: JPMorgan, Edward Jones, Bloomberg
Author: Senior Investment Strategist Wealth StrategistSince joining W&A in 2014, Tim has been responsible for managing relationships with clients and providing financial planning services covering the areas of retirement, income tax, estate and gift, risk management, and education. In addition to client responsibilities, Tim serves on the firm’s investment committee assisting in portfolio construction and allocation as well as the searching and vetting of portfolio strategies. He is also an occasional author of W&A’s Weekly Strategic Insight commentary. Tim received his Bachelors in Accountancy and Masters in Taxation from the University of Mississippi in 2008 and 2009, respectively. He completed the CPA exam in 2011 and is a licensed CPA in the state of Tennessee. He earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) certification in 2014 and Personal Financial Specialist (PFS) credential in 2015. After completing his Masters at Ole Miss, Tim started his career at Reynolds, Bone & Griesbeck PLC as a tax associate in 2009. While at RBG, Tim worked with a wide range of clients, performing tax compliance and planning services for individuals, estates, trusts, partnerships, and corporations. Tim is a member and/or serves on the following organizations: • The American Institute of Certified Public Accountants • The Tennessee Society of Certified Public Accountants (Council member and VP of Programs and board of directors for the Memphis Chapter) • The Financial Planning Association (President-elect and board of directors for the Greater Memphis Chapter) Tim is originally from Marks, Mississippi, but has lived in East Memphis since starting his career. He is married, and he and his wife, Mary Agnes, are the proud parents to a son, Wilkes, daughter, Edie, and Goldendoodle, Penny.


Timothy W. Ellis, Jr., CPA/PFS, CFP®

Senior Investment Strategist

Wealth Strategist

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