PAS Weekly Commentary

Market Struggles as Fed Does the Expected

After the S&P 500 ended last week at a closing record high, the benchmark index fell 1.9% this week, as investors took profits and digested the FOMC policy decision. The Russell 2000 (-1.7%) and Dow Jones Industrial Average (-1.7%) both declined 1.7% while the Nasdaq Composite (-3.0%) underperformed with a 3.0% decline.

As expected, the Fed left the target range for the fed funds rate unchanged at 0.00-0.25%, said it will double the reduction of asset purchases to $30 billion per month ($20 billion for Treasuries and $10 billion for agency MBS), and signaled three rate hikes in 2022 amid expectations for continued inflation pressures.

On a related note, the Producer Price Index for November came in hotter than expected, with the index for final demand up 0.8% month-over-month ( consensus 0.5%) and up 9.6% year-over-year.

Interestingly, the only day the S&P 500 closed higher was Fed decision day, and that was largely due to short-covering activity on the view that Fed Chair Powell didn't sound as hawkish as feared. The market fumbled that rally over the next two days, leaving the sectors mixed by week's end.

The information technology (-5.1%), consumer discretionary (-4.3%), and energy (-5.0%) sectors were the weakest performers with losses over 4.0%. The defensive-oriented health care (+2.5%), real estate (+1.6%), consumer staples (+1.2%), and utilities (+1.2%) sectors rose more than 1.0%.

With Apple (AAPL) nearly hitting a $3.0 trillion market capitalization, investors presumably felt it was appropriate to take profits, especially when also taking into consideration downside guidance from Adobe (ADBE) and the continuing spread of the coronavirus.

The 10-yr yield fell nine basis points to 1.40% amid increased demand while the 2-yr yield decreased two basis points 0.64% despite the Fed signaling three rate hikes next year.

Elsewhere, the Bank of England increased its bank rate by 15 basis points to 0.25% in a surprise move. The European Central Bank and Bank of Japan left rates unchanged, as expected, and announced a further tapering of asset purchases.

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Data and rates used were indicative of market conditions as of the date shown and compiled by Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. Each company’s security affects the index in proportion to its market value. NASDAQ Composite Index is a market value-weighted index that measures all NASDAQ domestic and non-U.S. based common stocks listed on the NASDAQ stock market. Dow Jones Industrial Average is a widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials, but also includes financial, leisure and other service-oriented firms. Russell 2000 Index measures the performance of the smallest 2,000 companies in the Russell 3000 Index of the 3,000 largest U.S. companies in terms of market capitalization. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

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