Financial Market Roundup
Produced by Fifth Third's Investment Management Group

In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of December.

GLOBAL
TRENDS

Yellow Arrow Pointing Right - Neutral

The COVID-19 pandemic has continued to have a major impact on life across the globe, and therefore economic activity, employment, and corporate earnings. Governments around the world are mixed on COVID-19 related guidelines as global daily cases reached records in December. While the threat of COVID-19 variants continues, particularly with the discovery of omicron, vaccines appear to provide a level of protection that mitigates the most severe economic risks. COVID-19 vaccine booster shots have been approved in the U.S. for all adults and are strongly recommended by the CDC. Sixty-two percent of the total U.S. population was fully vaccinated as of the end of December, while 33% of those fully vaccinated have gotten their booster shot. Lingering COVID-19 economic restrictions, supply chain bottlenecks, vaccine distribution and administration data, government fiscal stimulus measures, central bank policy actions, geopolitical tensions, and inflation measures are topics that the Investment Management Group is monitoring.

CENTRAL BANK
POLICIES

Yellow Arrow Pointing Right - Neutral

Major global central banks continued to support the global economy by maintaining low interest rates and implementing programs to increase market liquidity in response to the uptick in COVID-19 variant worries. At its December meeting, Federal Reserve officials voted to double the pace of tapering asset purchases, putting the Federal Reserve on track to conclude the program in March. The faster pace puts the Fed in a position to raise rates sooner to counter inflation pressures if needed. The central bank remains committed to using its full range of tools to continue to provide support for the recovery and will not act impulsively. The European Central Bank (ECB) left rates unchanged in December and remains committed to supporting the region’s economy. The Bank of Japan (BOJ) also maintained monetary policy settings at its latest meeting and extended assistance to small businesses.

EQUITY
PERFORMANCE

Green Arrow Pointing Up - Positive

Global equities were higher in December as largely shrugged off increasing COVID-19 health concerns and a more hawkish Federal Reserve. The S&P 500 Index rose 4.5% for the month, ending the year up 28.7% in total return. The blue-chip Dow Jones Industrial Average added 5.5% in December for a return of 21.0% in 2021. The tech heavy NASDAQ increased 0.8% last month and rose 22.2% in 2021. International stocks were positive for the month. The MSCI All Country World Index of developing and developed market stocks rose 4.0% in total return in December and ended 2021 up 19.0%. Emerging market stocks underperformed international developed stocks for the month and the full year. The MSCI Emerging Markets Index added 1.8% in December, but ended the year down 2.5%. The MSCI EAFE Index of developed international equities rose 5.1% for the month and 11.9% for the year.

INTEREST RATES
AND GROWTH

Yellow Arrow Pointing Right - Neutral

Intermediate-term yields rose in December amid rising COVID-19 threats that spurred volatile trading days and as the Federal Reserve turned more hawkish. The 10-year U.S. Treasury yield rose 7 basis points in December to end the year at 1.51%, roughly 60 basis points higher than at year-end 2020, but lower than the 1.74% March high. The U.S. economy expanded at a 2.3% annualized rate in the third quarter, according to data from the Bureau of Economic Analysis. Personal consumption, the largest contribution to GDP, increased at an annualized rate of 2.0%, a substantial slowdown from the second quarter. Economists currently expect growth to progress as the U.S. economy continues to reopen, though perhaps at a slower rate than previously expected given developments in COVID-19.

POLITICAL AND
REGULATORY TRENDS

Yellow Arrow Pointing Right - Neutral

U.S. government officials came to an agreement on a short-term government funding bill to prevent a government shutdown. The measure will keep the government funded through February 18, allowing Congressional leaders to come to an agreement. The House of Representatives also passed a $2.2 trillion social spending plan in November, which continues to be negotiated in the Senate. Congressional leaders hoped to pass a final version of the Build Back Better plan before Christmas but were unable to do so as Senator Manchin voted against the bill. The bill passed in the House includes a 5% surtax on modified adjusted gross income in excess of $10 million and an additional 3% surtax on modified adjusted gross income in excess of $25 million. Notably absent from the latest version of the legislation is any change to the capital gain tax rate, the gift and estate tax exemption amount, or the grantor trust rules.

INVESTMENT
TRENDS

Yellow Arrow Pointing Right - Neutral

Inflation concerns continued to dominate investment themes in December, amid disrupted supply chains, energy shortages and a tightening labor market, with market participants debating whether inflationary factors will persist. COVID-19 concerns escalated amid the introduction of the omicron variant, which has spread quickly around the world with daily cases reaching records. Vaccine distribution continues in the United States with booster shots recommended for all adults and central banks and governments continue to offer monetary and fiscal stimulus; the combination of which has lowered overall economic and financial market uncertainty. While markets are feeding off massive fiscal stimulus and indicators of improving economic data, some areas of the economy, particularly industries with supply chain worries and those significantly impacted by COVID-19 cases rising, remained depressed in December. Despite lingering COVID-19 disruptions, with the tailwinds of government stimulus, central bank liquidity, vaccine implementation, excess capacity, and pent-up demand, global economic growth is likely to continue in 2022.