Gill Capital Partners Holiday Update
First and foremost, all of us at Gill Capital Partners would like to say Happy Holidays to our friends, clients and partners, and wish you all a peaceful and healthy new year. The team at Gill Capital Partners is incredibly thankful for all of you. We feel fortunate for the relationships we have with our clients, friends, partners, and colleagues.
As we approach the end of the year, we continue to see increased market volatility, with markets swinging wildly from one day to the next (though, interestingly, not really moving a whole lot over the course of the past few weeks). Inflation and the Federal Reserve have certainly been leading the financial market headlines, along with the rapid spread of the new Covid variant and the failure to pass Biden’s spending program before the end of the year. We will touch on each of these below, and of course provide our view.
Inflation, Interest Rates and the Federal Reserve
The Federal Reserve had its final meeting of the year last week and announced that they will continue to reduce the stimulus programs that have been in place since Covid began. More specifically, they announced that they will continue to reduce the amount of bonds they are purchasing each month at a more aggressive pace and hope to see an end to that program in late winter or early spring of 2022. Additionally, the central bank expects to start raising short-term interest rates in 2022, and the Fed forecasted as many as three .25% hikes in 2022, with potentially more to follow in 2023 and 2024. At the same time, they increased their inflation outlook for 2021 to 5.3%, and slightly increased their 2022 inflation forecast to 2.6%. Short-term interest rates moved a bit higher leading up to this announcement, but long-dated rates actually came down, confusing many investors who expect interest rates to move dramatically higher across the curve.
Our view – Pundits largely anticipated what the Federal Reserve was going to do and say following their meeting, and many were fearful that markets would react poorly to the news. Quite the opposite occurred, however, with equities moving higher following the announcement and interest rates remaining steady. The Fed’s announcement was not a surprise, nor was it overly aggressive. Let’s be clear about what the Fed said: they are not talking about aggressively raising interest rates; in fact, they are not even forecasting touching rates until next year, when they hope they can move the overnight borrowing rate from zero to .75%, hardly a restrictive stance. Further, the reduction to their bond buying program isn’t in and of itself restrictive, they are just planning to reduce the amount of stimulus. Finally, while inflation is running high, the Federal Reserve continues to believe it will moderate, as do we. They see inflation running at half the pace next year and returning to much more normal levels. So, while the markets tend to get whipped into a frenzy about inflation and interest rates, we are less concerned. We continue to believe that this Federal Reserve has very little interest or ability to aggressively increase interest rates. They are telegraphing very clearly what they are going to do. Frankly, it is not an especially restrictive plan, and the economy should be able to handle it. Interest rates remain extremely low, even if they do raise rates next year.
Covid Update
The new Omicron variant is spreading quickly and is now the predominant strain in the U.S. just 3 weeks after its discovery. It is still too early to tell the severity and extent of the new strain, but it is forcing closures and increased precautions globally.
Our view – First of all, we hope you’re all able to stay safe and take the appropriate precautions to keep you and your loved ones healthy. While the news of this new variant and wave of infections is not welcome, nobody really knows yet what the extent of this outbreak will be. We are certainly concerned about the rapid spread of this variant. Closures and increased precautions can and will lead to economic disruptions, especially during this time of the year, so we will be watching closely. From an economic perspective, we know that the government and the Federal Reserve will be there to act quickly if necessary to provide liquidity and support to the economy. However, we are hopeful that this will not be needed this time.
Build Back Better Spending Plan
In a major blow to President Biden’s agenda, Senator Joe Manchin from West Virginia said he would not vote for the President’s spending plan as it is currently written. Democrats needed Senator Manchin’s support to pass the bill through the 50-50 senate. Biden and the Democrats were hoping to push this legislation through, as it is one of the centerpieces of the President’s economic agenda. The plan, which is roughly $2 trillion in size, seeks to create universal prekindergarten programs, subsidize childcare costs, lower prescription drug costs and offer tax credits for reducing carbon emissions. The bill was seeking to offset the spending by raising taxes on corporations and ultra-high-income earners.
Our view – We anticipate this bill will be revised in early 2022 and possibly scaled back, which we saw happen with the infrastructure bill. Senate majority leader Chuck Schumer has vowed to revise the legislation and have it ready for a vote early next year. As we have said before, the stock market likes government spending, so any new spending would likely be viewed positively by equity markets. Some major economists have already begun to dial back economic growth projections for next year that were tied to the legislation passing, but we feel it is too early to tell.
We hope everyone has an excellent holiday season. Stay healthy and safe!
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.