This period of time is truly demonstrating what "volatility" means for investors in the stock market. In last week's weekly round-up, we were just writing about the market sitting at all-time high and having had the best positive week of the year. Now to this week, we got a totally opposite picture, having the worst loss since February. The S&P 500 closed lower on Friday to end what was a highly volatile week. There was a ton of rotational action and bifurcation occurring under the hood. Health care, real estate, utilities, and the consumer staples sectors all finished modestly higher for the week. The materials sector edged lower, and the drops were more pronounced in financials, communication services, industrials, tech, consumer discretionary, and energy.

Explaining the moves this week

The action can be easily explained. If the economy hits a speed bump from either the Federal Reserve tightening or Covid-19 rapidly spreading around the world, the companies that will most likely be able to do their numbers are the ones that do best in a slowdown. Health care, utilities, and staples don’t need a robust environment to hit guidance, but the industrials, energy, and consumer spending-driven businesses sure do better when the economy is firing on all cylinders.

Meanwhile, a less accommodative Fed has investors evaluating their risk tolerance against the potential of a rising interest rate environment, explaining why we continue to see buying interest in companies that make stuff and do things, and pressure in unprofitable conceptional story stocks.

Here is a quick look at some of the broader market measures we like to keep an eye on: The U.S. dollar index was about flat on the week at 96. Gold rallied to the $1,800 level in the days after Wednesday’s FOMC press conference. WTI crude prices slipped to roughly $70, as the spread of the omicron variant weighed on global demand. And the yield on the 10-year Treasury fell to around the 1.41% level amid omicron variant uncertainty. 

FOMC December 2021 Meeting 

Fed Chair Powell and the Fed delivered as expected this week, announcing the Fed would accelerate the pace of its bond tapering program and increased the likelihood of three interest rate hikes in 2022. The word "transitory" was dropped, as expected, and the taper of the Fed's balance sheet is doubling to $30 billion per month from $15 billion. The median of the "dot plots" is now at three hikes in 2022 vs. one previously and then another three in 2023, opening the door for a hike as early as March of next year, although we suspect the impact of the Omicron variant and economic data to be had in the coming months will be the determining factor for that. Helping soothe the market, Powell shared the Fed will tighten policy in a gradual, yet accommodative way because of robust economic activity that is driving inflation higher. Given the Fed's role as a cheerleader for the economy, that was likely Powell's way of signaling the Fed's view that it will look to do no harm to the economy, which it currently sees as being able to digest any incremental rate hike.

Final Two Weeks Of 2021

Market will be closed on Friday, Dec 24th in observance of the Christmas Holiday. The last two weeks of the year are likely to be quiet, given traders and investors go on holidays. We're still in the camp that we'll get a Santa Claus rally, so let's buckle up and ride the last two weeks. The best day to buy will be on Tuesday (21st Dec).