Luxury Car Brands Have Peak
Sales Year

It was interesting to note, amid other economic indicators, that many of the highest of the high-end auto brands are having banner years. While many more everyday domestics and imports are still dealing with supply issues, to the point where used cars are in high demand, “top-shelf” auto brands like Rolls-Royce, Bentley, and Lamborghini are either reporting or anticipating peak sales.¹

Why is that? It turns out that, while the pandemic hit them in 2020 like anyone else, these brands decided to shift their emphasis to bread-and butter factors, while still remaining attractive to wealthy buyers. Newer models offer hybrid options, designs that are more practical, such as sedans and SUVs, and, perhaps most importantly, more affordable price points. You mix these factors together with lower interest rates, and this banner year starts to make more sense.¹

It’s good to see that even these luxury brands are making decisions with the bottom line in mind. It’s an indicator that, for many companies in many fields, everybody’s ready to get down to business. So, while it might be a while before you see me sporting around in a Bentley (unless I get a good deal), you will see me scanning the business pages for stories like this, and other signals that the economy may be on the right track.

Don’t Fight the Fed

You may have heard the old Wall Street saying, “Don’t fight the Fed.” It suggests that investors should align their strategy with the Federal Reserve’s outlook rather than try to outsmart the world’s most powerful banker.

In the past few months, the Fed has said it’s prepared to raise short-term interest rates in 2022. And so far this year, interest rates have been trending higher, which has been one of the factors contributing to the market volatility in the first few trading days.

The perception of a more hawkish Fed put a hard stop to the year’s positive start and pushed bond yields higher and stocks into a broad retreat.

Technology and other high-valuation shares were particularly hard hit by rising yields. Even the larger capitalization technology companies with strong cash flows and profits were damaged. As yields trend higher, investors are questioning if these companies can lead the market in 2022.

Fueling this decline was a four-day sell-off of technology companies by hedge funds that, in dollar terms, represented the highest level in more than ten years. Stocks continued to struggle into the final trading day, unsettled by a renewed climb in yields and an ambiguous employment report.¹

Minutes of December’s Federal Open Market Committee (FOMC) meeting were released last week and it revealed a more hawkish Fed than investors had been expecting. One surprise was that the first hike in interest rates could occur as early as March. Another, and perhaps more consequential, surprise was the idea of beginning a “balance sheet runoff” by the Fed following the first hike in the federal funds rate.²

A balance sheet run-off means that maturing bonds won’t be replaced with new bonds, the result of which is a smaller Fed balance sheet. Many investors view this step as removing liquidity from the system, a departure from market expectations that the balance sheet would remain flat during the Fed’s pivot to monetary normalization.

When creating a portfolio, our professionals consider a wide range of factors, including the Fed’s outlook. The Fed may not always be correct, but we’ve found that understanding its overall strategy can only help when managing money

Outlook 2022

By any measure, 2021 was a strong year for investors. But what’s in store for 2022? From my perspective, I expect that many of the same forces that influenced markets last year will play a role again in the year ahead.

COVID-19 remains tragic and unpredictable. The pandemic was one of the primary drivers of financial market activity in 2021. I hope that the worst is behind us, but I would not be surprised to see COVID-related events influence markets in the New Year.

The Federal Reserve will continue to get its share of headlines. From Fed Chair’s Powell’s nomination hearings to potential changes in interest rates, expect investors’ attention to shift to the Fed from time to time in 2022.

Tax law changes are always possible, but many of the anticipated federal tax law changes in 2021 were linked to President Biden’s Build Back Better plan, which ended the year in debate with Congress. So stay tuned here.

Thanks for your confidence in 2021. Here’s to a prosperous new year!

For more insight into Outlook 2022, join us for an exclusive online event.

AQuest Wealth’s Dr. Jason Van Duyn examines the economy, stocks and bonds, and policy, economic, and market forecasts for 2022.

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Fed Speak

Most people have heard about the Federal Reserve, but I’ve found that few understand the many roles it plays in the overall economy over the years.

The Fed makes headlines every few weeks by updating investors on what’s going on with interest rates. Most recently, the Fed said it’s prepared to raise interest rates next year to help manage our economy.

But some parts of the Fed’s job can be a bit of a head-scratcher. For example, did you know the Fed also is responsible for overall employment?

Part of my job is keeping an eye on the Federal Reserve. The Fed’s Board of Governors has eight regularly scheduled meetings a year (others, as needed), and when the two-day event ends, the Fed Chair updates the country on the economy. In the weeks that follow, Fed governors often schedule speeches to help clarify the Fed’s position on interest rates, inflation, and employment.

So if the Fed creates a headline that you don’t understand, please give me a call. I’ll help you translate the “Fed speak.

Inside Inflation

If you’ve been watching inflation news in recent months, you might have found it a bit overwhelming. I know at our house, we’re paying more for everything from milk to batteries to holiday gifts this year.

I want you to know that I’m watching inflation closely, and keeping tabs on various economic indicators. Sometimes, as you know, the “devil is in the details.”

For example, have you noticed the inflation in the used car market? I did some research and found that used car prices are linked to new car inventories, which are at their lowest level in decades. Once dealerships can get more new cars in stock, used car prices are expected to fall.

Hope this helps you put today’s “pretty penny” prices into perspective. As always, give me a call if you’d like to chat about inflation or anything else that’s on your mind.

The Power of the Consumer

A confident consumer can be a powerful ally in an economy. But when the consumer starts to have questions, we can measure consumer confidence in everything from retail sales to home buying to the personal savings rate.

In recent months, consumer confidence has been falling as inflation expectations have been rising. So, if inflation slows, does that mean the consumer will regain confidence? It’s possible, but other factors can influence consumer confidence, including perceptions of COVID-19.^1,2

When the consumer does regain confidence, we may expect it to be a powerful force driving economic growth. Many may base the 2022 U.S. economic outlooks on a rebound in consumer confidence, leading to increased spending.³

In some ways, the only consumer confidence that matters is yours. Are you optimistic about 2022, or do you have concerns or doubts that are holding you back? We look forward to hearing from you.

Powell News Kicks Off Volatile Season?

The holiday season is often a quiet, positive time for the financial markets. The phrase “Santa Claus Rally” was coined in the early 1970s to reflect the stock market’s upward bias during the November-January stretch.¹

But this year, the markets might face some crosswinds as we travel through the holidays. The stock market initially reacted well to news that President Biden will nominate Jerome Powell to lead the Federal Reserve for a second term. But trading became choppy as the session continued.²

Next up, the markets may react to an active December legislative calendar. Between today and New Year, Congress is preparing to work on the federal budget, the debt ceiling, and the Build Back Better plan.

Economic news also may influence trading in the weeks ahead. For example, the next reading on inflation (Consumer Price Index) releases on Friday, December 10.³

Last, COVID-19 continues to be unpredictable. Many states have seen an uptick in infections in recent weeks, and a few nations have adopted more aggressive lockdowns to help manage the most recent wave.⁴

Markets tend to be comfortable with some uncertainty, believing that time will resolve the issues. But this year, it might be best to prepare for Santa’s sleigh to hit a few speed bumps along the way.

Is Inflation Peaking?

You see it in prices at the grocery store and the gas station. You feel it in your monthly budget. So why don’t the financial markets seem too concerned about inflation?

Remember, financial markets are considered “discounting mechanisms,” meaning they are looking six- to nine-months into the future. And by June 2022, the financial markets expect that inflation will be lower than today.¹

One lesser-known indicator helps support that forecast is called the Baltic Dry Index. It measures the cost of transporting raw materials, such as coal and steel. The index has been trending lower for several weeks, which in the past has suggested that prices may be more manageable in the months ahead.²

No indicator is fool-proof. That’s why the Baltic Dry Index is just one of the many indicators that our professionals follow when watching inflation. They also keep a close eye on the Fed, which is responsible for controlling inflation.³

With the economy improving, the Federal Reserve has indicated it will be tapering bond purchases this month. That may help with inflation. The Fed also has prepared the markets for higher interest rates in 2022. That, too, may help.⁴

For now, it’s important to understand that Inflation can influence interest rates, which often play a role in how a portfolio is constructed. We’re keenly focused on what’s next for inflation to determine if any portfolio changes are appropriate in the future.

Biden Signs Infrastucture Bill

At the White House on Monday, President Biden signed a $1T bipartisan infrastructure bill set to enable enhancements for transportation and utilities over the next five years.¹

For each of those five years, $550 billion will be invested into both the physical infrastructure of the nation (roads, highways, and rail) as well as bringing broadband internet to areas it hasn’t been previously available.¹

The bill will also create jobs in many parts of the country. Projects ranging from replacing lead pipes in water systems and upgrades to bridges will now move from the planning stages, and into the real world.¹

As usual, large government programs mean money for private concerns as contractors place bids and get hired for these projects. You may have questions about how these infrastructure projects might affect your overall financial strategy. I’d be happy to make time to discuss your questions and concerns as these projects break ground.

Tax Changes: What’s In, What’s Out?

While it’s still too early to draw any final conclusions, Congress is getting closer to outlining what tax law changes are under consideration to pay for the proposed $1.75 trillion Build Back Better Plan.¹

For now, it appears that changes to capital gains and personal tax rates are off the table. The conversation is shifting to a new corporate minimum tax while adjustments to estate taxes may be still under consideration.¹

Investors cheered as some of the tax-law uncertainty was lifted. In October, the Standard & Poor’s 500 stock index tacked on nearly 7 percent.²

While some initiatives are left behind, others are seeing renewed interest. A growing number also appear to be warming up to the idea of a “billionaire’s tax,” a special tax designed to focus on the 800 or so wealthiest Americans.³

Critics of the billionaire’s tax remind the legislature that when the Alternative Minimum Tax (AMT) was introduced in 1969, it was targeted at 155 individuals with adjusted gross incomes above $200,000 who paid zero federal income tax on their 1967 tax return. But by 2017, nearly five million taxpayers were assessed a minimum tax.^4,5

“It ain’t over till it’s over,” said baseball legend Yogi Berra, when his 1973 New York Mets appeared out of the National League Pennant race. (The Mets eventually won the pennant but lost the World Series in 7 games to the Oakland Athletics.)⁶

If you’re feeling unsettled as Congress continues to work on these tax law changes, please reach out. Or if you want to talk about World Series baseball, give us a call.