Over the last week alone, equities have clawed entirely the Omicron and Federal Reserve-related selloff over the last month.

Part of the catalyst for those moves were reports of milder symptoms associated with the Omicron variant as well as tamer increases in hospitalizations rates vs. the number of reported cases. Also spurring the rebound in the market's mood, Pfizer (PFE) CEO Albert Bourla said last week three doses of the existing Covid-19 vaccine neutralized the Omicron variant in preliminary lab studies. We continue to wait for more thorough testing and findings on the vaccine efficacy before celebrating.

We would note that even as the Omicron pullback has been erased, and forward progress on the U.S. debt ceiling has emerged, there is still one giant hurdle ahead for the market. Front and center is the Federal Reserve on Wednesday (we'll discuss later).

Finally, late last week, China's Evergrande (EGRNF) was back in the headlines, and odds are there will be some fallout in the coming weeks. The company said there was "no guarantee" it could meet its debt repayments as it entered a restructuring process with assistance from local government officials. Complicating matters even further, People's Bank of China Governor Yi Gang said the inability to meet obligations is a market event and will be dealt with in a market-orientated way. In the next few weeks we will see what that means for Evergrande's $300 billion in total liabilities and those holding them.

Economy

The U.S. Department of Labor reported on Thursday that in the week ending Dec. 4, initial jobless claims were 184,000, representing a weekly decrease of 43,000, and well below estimates for 220,000. The four-week moving average, used to smooth out weekly volatility, came in at 218,750. This represents the lowest level for the moving average since March 7, 2020 when it was 215,250.  

On Friday, the Bureau of Labor Statistics released CPI data, which measures the price to consumers for a basket of goods and is therefore used as one measure of inflation. On a seasonally adjusted basis, the headline reading indicated a 0.8% advance in November, hotter than the 0.7% consensus and coming on the heels of a 0.9% advance in October. Contributing to the headline reading, the food index rose 0.7%, with the food at home index increasing 0.8% and the food away from home (not seasonally adjusted) increasing 0.6% in November. Additionally, the energy index increased 3.5%, with the energy commodities index advancing 5.9% and the energy services index increasing 0.3% for the month. That monthly advanced resulted in a 6.8% annual CPI increase, an acceleration from the 6.2% rate seen in the 12-month period ending in August, however, in line with expectations. Notably, this was the largest annual increase since the 12-month period ending June 1982.

CPI excluding food and energy, or "core CPI," is often viewed as a proxy for inflation. Food and energy get stripped out because their prices tend to be volatile from month to month. Core CPI increased 0.5% in November, matching expectations and resulting in a 4.9% annual core CPI increase, in line with expectations and an acceleration from the 4.6% rate seen in the 12-month period ending in October.

Looking at the market tape, we can see that the hot CPI report was shrugged off by investors, because even though we got a very hot inflation number (largest annual increase since 1982), major indices rallied on Friday, closing out the best week of gain in 2021. This market reaction confirms our view that inflation has peaked. 

The Coming Week

For our portfolio, actions concentrate on Wednesday. Eli Lilly (LLY) will have an investor meeting on Wednesday at 9:00 am est. In the afternoon, the Fed completes their monetary policy meeting. We'll get to read their reports out at 2:00 PM, as well as hear from Chairman Jerome Powell himself about how the Fed is thinking about tapering, tightening, and inflation. We believe this is the biggest event for the market to watch going to year's end.

Chart Of The Week: S&P 500

As we correctly predicted in last week's weekly round-up, all three of our arguments became true and we got an incredible rally in the market. We will provide an update on where we stand.

Bottom line, we now have all three arguments becoming true, playing in our favor, pointing towards more gains for the market going into year's end. However, we have to note that the Federal Reserve's decision can turn the market around in no time (see what happened in December 2018), as a result, we really need to closely watch what happens on Wednesday afternoon. We advise to trim big winners on Monday and Tuesday, not buy anything. After the event on Wednesday, if the reaction is positive, the market can be bought going into year's end.