Market Recap

Posted on January 14, 2022 by Gemmer Asset

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Market Recap


January continues to be soft with losses across most equity and fixed income asset classes. But for the first time in a while international stocks are outpacing domestic equities, and value continues to beat growth by a decent margin.


A few economic reports of note. Retail sales came in soft – down -1.9% in December month-over-month. This was much weaker than expected, but sales are up +16.9% year-over-year, as you can see below.



The other major report was inflation (CPI) for December. As expected, this came in hot. The headline number was up +7% while core was up +5.5%. You have to go back to the late 80’s to find comparable numbers.



Used car prices remain something to behold. They were up +3.5% in December all by themselves. Much more of this and HGTV will have start a show about flipping used cars.



Anyone who’s been looking at Bring A Trailer recently can attest to some of the crazy prices. An achingly pretty Alfa for $140K?? 


Anyhow, inflation is turning into a political problem for a number of reasons, not the least of which is the fact that wage growth has turned negative when adjusted for inflation. You can see the spread between wages and inflation in the bottom panel below.



Tight job market, employers hiking wages to attract talent, but all the benefits being wiped away by higher prices. Not a great story in an election year!!


On a related topic, even though longer-term interest rates increased modestly this week, there is still a big disconnect between rates and inflation. The chart below plots monthly inflation against the yield on the 10-year, and the red dots are the observations over the last few months. As the title says – something has to give.



But what’s going to give? Do long-term rates have to increase, or might inflation fall? That’s the $64 trillion question of course. It’s easy to be bearish on bonds, but the chart below should give us all pause. The blue line shows how much a European investor would earn buying U.S. Treasury bonds while at the same time hedging the currency risk. The orange line shows the same for a Japanese investor. Both yields (2.11% and 1.50%) are way above local rates and argue for continued, if not increased, demand coming from overseas for U.S. debt.



Could the disconnect persist? Time will tell, but we went through looking glass some time ago so nothing should surprise us anymore.


Charts We Found Interesting


1. COVID trends in New York are moving in the right direction.



2. More details continue to be published on South Africa’s experience with Omicron. All point to a less serious variant than Delta.



3. Technology and NASDAQ stocks have had a decent correction the last few weeks. Valuations are still….how should we say….optimistic?



4. It’s going to be an interesting spring selling season in many real estate markets. Inventory levels are at rock bottom compared to the last two years…



5. …but mortgage rates are ticking higher.



6. Oil was released from the Strategic Petroleum Reserve in Mid-December to help drive down prices. Now what?



7. Insane picture of astronaut Bruce McCandless II, the first person to conduct an untethered free flight in space!!





Have a good weekend.




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