The year 2021 was a year marked by the reopening of the economy, new vaccines, the ongoing pandemic, strong economic growth, an ultra-easy monetary policy, strong fiscal stimulus, higher home prices, inflation and rising oil prices.
While the CPI hit its highest reading in 40 years, investors chose to focus on several favorable tailwinds that enabled the broad-based S&P 500 Index to rack up 70 record closing highs in 2021. Moreover, last year’s strong performance came in the wake of upbeat returns in 2019 and 2020.
In fact, the total return of the S&P 500 Index has doubled—+100.4%—over the last three years ended December 31, 2021, according to S&P Dow Jones Indexes.
Key factors that fueled last year’s outperformance include low interest rates, historically low bond yields and an economic recovery that generated much-better-than-expected corporate profits. Notably, longer-term Treasury yields remained extremely low, despite strong growth and high inflation.
Yet, when troubles did surface, volatility was relatively muted. Sure, we had days when the market sold off, but sell-offs were short-lived and the S&P 500 failed to enter correction territory, a 10% decline.
As we look to 2022, we are in the midst of an election cycle, which could create uncertainty. And, the Federal Reserve has done an about-face on inflation. No longer is it “transitory.”
We are no longer hearing that the fed funds rate will likely remain near zero through at least 2023. No longer is Fed Chief Powell saying he’s “not even thinking about thinking about raising rates,” as he was in the early days of the economic recovery.
The Fed has penciled in three quarter-point rate hikes this year, and investors are bracing for at least four, as the year gets underway. In addition, the Fed is openly talking about shrinking its balance sheet.
Though businesses are grappling with the fallout of Omicron, early readings suggest the economy remains on solid ground.
| Table 1: Stock Indexes, 2021 Performance |
| Dow Jones |
1-year (%) |
| Industrial Average |
18.73 |
| Transportation Average |
31.75 |
| Utility Average |
13.43 |
| 65 Composite |
21.35 |
| Total Stock Market |
24.01 |
| NASDAQ Market |
| Composite |
21.39 |
| Nasdaq 100 |
26.63 |
| Biotech |
-0.63 |
| Standard & Poor’s |
| 500 Index |
26.89 |
| 100 Index |
27.55 |
| MidCap 400 |
23.21 |
| SmallCap 600 |
25.27 |
| SuperComp 1500 |
26.66 |
| Other U.S. Indexes |
| NYSE Composite |
18.17 |
| Russell 1000 |
24.76 |
| Russell 2000 |
13.7 |
| Russell 3000 |
24.00 |
| PHLX Gold/Silver |
-8.14 |
| PHLX Oil Service |
18.93 |
| PHLX Semiconductor |
41.16 |
| CBOE Volatility |
-24.31 |
| KBW Bank |
35.05 |
| Value Line (Geometric) |
18.14 |
| DJIA TR |
20.95 |
| NASDAQ Comp TR |
22.18 |
| S&P 500 TR |
28.71 |
Source: FactSet, Dow Jones Market Data, WSJ, S&P Global, Investing.com
| Table 2: S&P 500 Operating Earnings |
| |
Percent change from one year ago |
| 2021 Q3 |
42.6 |
| 2021 Q2 |
96.3 |
| 2021 Q1 |
52.8 |
| 2020 Q4 |
3.8 |
| 2020 Q3 |
-6.5 |
| 2020 Q2 |
-30.6 |
| 2020 Q1 |
-12.8 |
| 2019 Q4 |
3.1 |
| 2019 Q3 |
-0.3 |
| 2019 Q2 |
3.2 |
| 2019 Q1 |
1.6 |
Source: Refinitiv
Corporate stock buybacks hit new high in Q3
Record corporate profits are encouraging firms to return capital to shareholders. In Q3, buybacks hit a record $234.6 billion, according to S&P Dow Jones Indexes.
Buybacks were up 18.0% from Q2 2021 and up 130.5% from Q3 2020. Three hundred and nine companies reported buybacks of at least $5 million in Q3, though buybacks were top-heavy, with top 20 issues accounting for 53.8% of Q3 2021’s share repurchases. That’s down from Q2 2021’s 55.7%, but up from the pre-Covid historical average of 44.5%.
For the 12-month period ending in Q3 2021, buybacks totaled $742.2 billion, a 30.0% rise from the same period a year ago.
“While companies bought back shares in record numbers in Q3 2021, their expenditures appear cautious when measured against their earnings and market value,” said Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indexes. “Companies are expected to increase expenditures, which is needed for the higher priced shares, but not enough to impact share count.”
“Q4 2021 is expected to surpass the Q3 2021 record, as is 2021, which would replace the annual record of $806 billion set in 2018. At this point, a slight market downturn or correction could also see additional buying, as companies with strong (and expected strong) cash-flow stock up on shares. The proposed 1% buyback tax is not expected to materially impact buybacks,” he said.
| Table 3: S&P 500 Return of Capital |
| Quarter |
Operating earnings |
Stock buybacks |
Cash dividends |
| 2021 Q3 (prelim) |
$441.34 billion |
$234.6 billion |
$130.0 billion |
| 2021 Q2 |
440.0 |
198.8 |
123.4 |
| 2021 Q1 |
401.2 |
178.1 |
123.9 |
| 2020 Q4 |
321.8 |
130.6 |
121.6 |
| 2020 Q3 |
314.1 |
101.8 |
115.5 |
| 2020 Q2 |
221.5 |
88.7 |
119.0 |
| 2020 Q1 |
161.6 |
198.7 |
127.0 |
| 2019 Q4 |
324.5 |
181.6 |
126.4 |
| 2019 Q3 |
330.4 |
175.9 |
123.1 |
| 2019 Q2 |
333.3 |
165.5 |
118.7 |
| 2019 Q1 |
316.6 |
205.8 |
117.3 |
|
Source: S&P Dow Jones Indexes
Key S&P 500 sectors—broad-based gains
Eight of eleven of the major S&P 500 sectors recorded an advance of more than 20%, with the much-maligned energy sector leading the way thanks to last year’s big increase in oil prices.
Real estate also posted an impressive gain in 2021. The economic recovery, the reopening and a return to malls and shopping, rising real estate values, hunt for yield, higher rents, and a hedge against inflation contributed to last year’s spectacular gain.
Meanwhile, low interest rates and strong growth continued to fuel the advance in the tech sector.
On the flip side, consumer staples and utilities posted double-digit gains, but these defensive sectors lagged significantly behind the broader market.
| Table 4: Standard & Poor’s 500 Key U.S. Sectors, 2021 Performance |
| S&P Category |
1-year(%) |
| Energy |
47.74 |
| Real Estate |
42.50 |
| Info tech |
33.35 |
| Financials |
32.54 |
| S&P 500 Index |
26.89 |
| Materials |
25.00 |
| Health care |
24.16 |
| Consumer discretionary |
23.66 |
| Communication service |
20.53 |
| Industrials |
19.40 |
| Consumer staples |
15.55 |
| Utilities |
13.99 |
Source: StockCharts
| Table 5: Global Indexes, 2021 Performance |
| Global Stock Indexes |
1-year (%) |
| The Global Dow (World) |
18.62 |
| DJ Global ex-U.S. (World) |
5.68 |
| Asia Pacific |
| Asia Dow |
-0.72 |
| Australia: All Ordinaries |
13.55 |
| Australia: S&P/ASX |
13.02 |
| China: H-Share Index |
-23.30 |
| China: Shanghai Composite |
4.80 |
| China: Shenzhen Composite |
8.62 |
| Hong Kong: Hang Seng |
-14.08 |
| India: S&P BSE Sensex |
21.99 |
| India: S&P CNX Nifty |
24.12 |
| Indonesia: JSX Index |
10.08 |
| Japan: Nikkei 225 |
4.91 |
| Malaysia: FTSE Bursa Malaysia KLCI |
-3.67 |
| New Zealand: S&P/NZX 50 |
-0.44 |
| Philippines: PSEi |
-0.24 |
| South Korea: KOSPI |
3.63 |
| Singapore: Straits Times |
9.84 |
| Thailand: SET |
14.37 |
| Europe |
| Europe Dow |
18.95 |
| Euro Stoxx |
20.44 |
| Stoxx Europe 600 |
22.25 |
| Austria: ATX |
38.87 |
| Belgium: Bel-20 |
19.02 |
| Denmark: OMX Copenhagen |
27.22 |
| Finland: OMX Helsinki |
18.31 |
| France: CAC 40 |
28.85 |
| Germany: DAX |
15.79 |
| Greece: Athex Composite |
10.43 |
| Italy: FTSE MIB |
23.00 |
| Netherlands: AEX |
27.75 |
| Norway: OBX Index |
24.83 |
| Portugal: PSI 20 |
13.70 |
| Russia: RTS Index |
15.01 |
| S. Africa: FTSE/JSE Africa All Share |
24.07 |
| Spain: IBEX 35 |
7.93 |
| Sweden: OMX Stockholm 30 |
34.98 |
| Switzerland: Swiss Market |
20.29 |
| Turkey: BIST 100 |
25.80 |
| UK: FTSE 100 |
14.30 |
| UK: FTSE 250 |
14.61 |
Source: FactSet; DJ Market Data; WSJ
| Table 6: Other Global Indexes |
| Index |
2021 (%) in USD |
2021 (%) in local currencies |
| MSCI EAFE |
8.78 |
16.05 |
| MSCI World |
20.14 |
22.45 |
| MSCI World Ex-USA |
10.13 |
16.66 |
| MSCI Emerging Markets |
-4.59 |
-2.29 |
Source: MSCI
Style: Large-cap growth leads the way
There has been no shortage of talk that value will finally have its moment in the sunshine. In 2021, value stocks outperformed among mid-caps and small-caps, but large-cap growth continued to post impressive returns, topping out at a total return of 31.76%.
What aids large-cap growth in today’s economy? In part, low interest rates. But rates can be a double-edged sword. What they give, they can also take away.
Bloomberg News provided a more technical explanation that’s worth sharing. “High-growth stocks are the most susceptible to the impacts of rising bond yields since their values rely heavily on future earnings, which analysts discount into current dollars by using prevailing market rates. The higher those rates go, the smaller the current value of those earnings become.”
It’s your standard discounted cashflow model.
Separately, last year’s rise in bond yields hampered returns for most bond funds, while a reach for yield and the expanding economy encouraged fund flows into the riskier side of the credit market, including high-yield (junk) bonds.
| Table 7: Selected Returns Performance—total return (%) |
| |
Annualized |
| U.S. Equity ETFs |
1-year |
3-year |
5-year |
10-year |
| iShares S&P 500 Growth ETF |
31.76 |
31.95 |
23.88 |
19.01 |
| iShares Core S&P 500 ETF |
28.66 |
26.03 |
18.44 |
16.50 |
| iShares S&P 500 Value ETF |
24.67 |
18.46 |
11.72 |
13.10 |
| iShares S&P Mid-Cap 400 Growth ETF |
18.70 |
22.36 |
14.42 |
14.31 |
| iShares Core S&P Mid-Cap ETF |
24.67 |
21.34 |
13.03 |
14.12 |
| iShares S&P Mid-Cap 400 Value ETF |
30.36 |
19.30 |
10.84 |
13.31 |
| iShares S&P Small-Cap 600 Growth ETF |
22.40 |
20.79 |
14.09 |
15.15 |
| iShares Core S&P Small-Cap ETF |
26.69 |
20.06 |
12.40 |
14.47 |
| iShares S&P Small-Cap 600 Value ETF |
30.47 |
18.47 |
10.05 |
13.32 |
| Global Equity ETFs |
| iShares Core MSCI Total Intl Stock ETF |
8.52 |
13.70 |
9.97 |
-- |
| iShares Europe ETF |
16.34 |
14.71 |
9.90 |
7.96 |
| iShares Latin America 40 ETF |
-13.41 |
-4.57 |
0.40 |
-2.80 |
| iShares Asia/Pacific Dividend ETF |
4.23 |
2.40 |
1.21 |
-- |
| iShares MSCI Emerging Markets ETF |
-3.72 |
10.03 |
9.09 |
4.78 |
| Bond ETFs |
| iShares U.S. Treasury Bond ETF |
-2.54 |
3.92 |
2.93 |
-- |
| iShares 10+ Year Invest. Grade Corp. Bond ETF |
-1.63 |
11.30 |
7.48 |
6.17 |
| iShares Core U.S. Aggregate Bond ETF |
-1.67 |
4.71 |
3.51 |
2.83 |
| iShares iBoxx $ High Yield Corporate Bond ETF |
4.12 |
7.39 |
5.20 |
5.48 |
| iShares Preferred and Income Securities ETF |
7.09 |
10.15 |
6.63 |
6.89 |
| iShares Core International Aggregate Bond ETF |
-1.76 |
3.56 |
3.22 |
-- |
| iShares J.P. Morgan USD EM Bond ETF |
-2.45 |
5.94 |
4.29 |
4.65 |
| iShares J.P. Morgan EM Corporate Bond ETF |
-0.45 |
6.44 |
4.80 |
-- |
| iShares National Muni Bond ETF |
1.24 |
4.44 |
3.75 |
3.28 |
| Sector Equity ETFs |
| iShares U.S. Technology ETF |
35.19 |
43.09 |
31.71 |
22.94 |
| iShares U.S. Industrials ETF |
16.93 |
21.99 |
14.75 |
15.06 |
| iShares Consumer Staples ETF |
17.29 |
25.83 |
14.90 |
13.70 |
| iShares U.S. Financials ETF |
31.46 |
19.76 |
13.25 |
15.37 |
| iShares U.S. Telecommunications ETF |
11.68 |
10.56 |
1.79 |
7.26 |
| iShares Core U.S. REIT ETF |
43.11 |
18.34 |
10.71 |
10.77 |
| iShares U.S. Utilities ETF |
16.76 |
12.83 |
10.82 |
10.61 |
| iShares U.S. Healthcare ETF |
23.40 |
19.85 |
17.39 |
17.06 |
| iShares U.S. Consumer Discretionary ETF |
19.62 |
23.81 |
18.29 |
17.87 |
| iShares U.S. Energy ETF |
53.37 |
3.92 |
-2.32 |
0.28 |
Source: iShares
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost.
Data through 12/31/2021
| Table 8: Treasury Rates—End of Month |
| |
3-month T-bill |
2-year Treasury yield |
10-year Treasury yield |
30-year Treasury yield |
10-year minus 2-year* |
10-year minus 3-month* |
10-year breakeven inflation rate** |
| Jan 2021 |
0.06 |
0.11 |
1.11 |
1.87 |
1.00 |
1.05 |
2.13 |
| Feb |
0.04 |
0.14 |
1.44 |
2.17 |
1.30 |
1.40 |
2.15 |
| Mar |
0.03 |
0.16 |
1.74 |
2.41 |
1.58 |
1.71 |
2.37 |
| Apr |
0.01 |
0.16 |
1.65 |
2.30 |
1.49 |
1.64 |
2.41 |
| May |
0.01 |
0.14 |
1.58 |
2.26 |
1.44 |
1.57 |
2.42 |
| Jun |
0.05 |
0.25 |
1.45 |
2.06 |
1.20 |
1.40 |
2.32 |
| Jul |
0.06 |
0.19 |
1.24 |
1.89 |
1.05 |
1.18 |
2.40 |
| Aug |
0.04 |
0.20 |
1.30 |
1.92 |
1.10 |
1.26 |
2.33 |
| Sep |
0.04 |
0.28 |
1.52 |
2.08 |
1.24 |
1.48 |
2.37 |
| Oct |
0.05 |
0.48 |
1.55 |
1.93 |
1.07 |
1.50 |
2.51 |
| Nov |
0.05 |
0.52 |
1.43 |
1.78 |
0.91 |
1.38 |
2.50 |
| Dec |
0.06 |
0.73 |
1.52 |
1.90 |
0.79 |
1.46 |
2.56 |
Source: St. Louis Federal Reserve
*Representation of the yield curve
**Breakeven Rate: 10-year Treasury yield minus 10-year TIPs yield, which provides a proxy for 10-year inflation expectations (what yield an investor is willing to give up for inflation protection).
Corporates bonds
Investment grade corporate bond yields have also risen but remain quite low. Given the strong economic recovery, which supports the creditworthiness of lower-grade firms and the search for yield, high-yield debt was relatively stable last year.
As a result, credit spreads narrowed. At 3.10%, the difference between longer-term Treasury yields and junk bond yields contracted to their lowest reading in almost 15 years.
| Table 9: ICE BofA U.S. Corporate Effective Yield—End of Month |
| |
AAA |
AA |
A |
BBB |
BB |
B |
CCC or below |
High-yield spread* |
| Jan 2021 |
1.68 |
1.56 |
1.64 |
2.16 |
3.44 |
4.77 |
7.78 |
3.84 |
| Feb |
1.97 |
1.79 |
1.86 |
2.37 |
3.52 |
4.79 |
7.64 |
3.57 |
| Mar |
2.11 |
1.96 |
2.04 |
2.55 |
3.58 |
4.70 |
7.41 |
3.36 |
| Apr |
2.04 |
1.86 |
1.94 |
2.45 |
3.43 |
4.57 |
7.31 |
3.28 |
| May |
1.98 |
1.81 |
1.89 |
2.38 |
3.43 |
4.67 |
7.15 |
3.34 |
| Jun |
1.88 |
1.76 |
1.82 |
2.28 |
3.20 |
4.42 |
6.64 |
3.04 |
| Jul |
1.77 |
1.67 |
1.73 |
2.18 |
3.19 |
4.62 |
7.21 |
3.32 |
| Aug |
1.80 |
1.71 |
1.77 |
2.24 |
3.12 |
4.53 |
7.33 |
3.21 |
| Sep |
1.94 |
1.86 |
1.91 |
2.38 |
3.30 |
4.65 |
7.48 |
3.15 |
| Oct |
1.97 |
1.92 |
2.01 |
2.47 |
3.42 |
4.83 |
7.61 |
3.15 |
| Nov |
2.00 |
1.95 |
2.05 |
2.55 |
3.81 |
5.28 |
8.32 |
3.67 |
| Dec |
2.03 |
2.02 |
2.11 |
2.60 |
3.40 |
4.75 |
7.96 |
3.10 |
Source: St. Louis Federal Reserve; ‘BBB’ is the lowest grade of investment debt
*ICE BofA U.S. High Yield Index Option-Adjusted Spread, a measure of the difference between the yield on high-yield bonds and long-term Treasuries.
Strong demand, supply chain woes boost commodities
Rising economic demand equates to rising demand for commodities. Mix in supply chain disruptions and it’s not a surprise to see the rise in oil and the CRB Commodity Index last year. Further, U.S. oil producers have been slow to raise production, and OPEC+ has not filled in the gap.
Yet, despite high inflation, gold lost ground last year. If you remain in the transitory camp, the lack of movement in gold prices would suggest that inflation will subside. However, the dovish view on inflation is not the current consensus.
| Table 10: Key Commodities/Indexes |
| |
Dec. 31, 2021 |
Dec. 31, 2020 |
| WTI crude front month contract |
$75.21/barrel |
$48.52/barrel |
| Gold front month contract |
$1,828.60/oz |
$1,895.10/oz |
| Nominal Broad U.S. Dollar Index |
$115.31 |
$111.33 |
| CRB Commodity Index |
$247.02 |
$178.29 |
Source: St. Louis Federal Reserve; Trading Economics; MarketWatch
GDP hits new high
GDP posted a substantial rise in Q1 and Q2 amid generous fiscal stimulus and the reopening of the economy. By Q2, real (inflation-adjusted) GDP surpassed its previous high. Nominal GDP is rising at a faster pace as it includes real growth and inflation.
| Table 11: Record GDP Decline, Record Rebound |
| |
Annualized quarterly change
in real GDP |
Annualized real GDP
in 2012 dollars |
Annualized nominal GDP |
| 2019 Q1 |
2.4% |
$18.83 trillion |
$21.00 trillion |
| Q2 |
3.2 |
18.98 |
21.29 |
| Q3 |
2.8 |
19.11 |
21.51 |
| Q4 |
1.9 |
19.20 |
21.69 |
| 2020 Q1 |
-5.1 |
18.95 |
21.48 |
| Q2 |
-31.2 |
17.26 |
19.48 |
| Q3 |
33.8 |
18.56 |
21.14 |
| Q4 |
4.5 |
18.77 |
21.48 |
| Q1 2021 |
6.3 |
19.06 |
22.04 |
| Q2 |
6.7 |
19.37 |
22.74 |
| Q3 |
2.3 |
19.48 |
23.20 |
Source: St. Louis Federal Reserve
Growth fuels job gains
Nonfarm payroll growth was very uneven last year, but strong economic growth did translate into 6.4 million net new jobs in 2021, according to the U.S. BLS Establishment Survey.
We also see significant employment gains in the Household Survey, which is used to measure the unemployment rate.
The Household Survey is a smaller survey and sometimes varies significantly from the Establishment Survey. But over a longer period, they tend to converge. Last year, employment increased by 6.1 million jobs.
| Table 12: Key Labor Market Indicators |
| |
Nonfarm payrolls (000s) |
Total Nonfarm Payrolls (000s) |
Unemployment rate (%) |
| Jan 2021 |
233 |
121 |
6.4 |
| Feb |
536 |
363 |
6.2 |
| Mar |
785 |
573 |
6.0 |
| Apr |
269 |
319 |
6.0 |
| May |
614 |
291 |
5.8 |
| Jun |
962 |
62 |
5.9 |
| Jul |
1091 |
1092 |
5.4 |
| Aug |
483 |
463 |
5.2 |
| Sep |
379 |
639 |
4.7 |
| Oct |
648 |
428 |
4.6 |
| Nov |
249 |
1090 |
4.2 |
| Dec |
199 |
651 |
3.9 |
Source: U.S. BLS Nonfarm payrolls subject to annual revisions with January release
Money supply growth remains robust
Right or wrong, early last year Powell dismissed any link between inflation and the money supply. But those who adhere to monetarist principles have pointed to the fast-growing money supply with unease.
However, the money supply (M2) is half the equation. The velocity (V), or turnover in money in the economy, is the other half.
M2 x V = Nominal GDP (Real GDP x Inflation)
Today, the Fed is talking about reducing its balance sheet when QE ends, likely in March. No timetable or detailed plan has been submitted, but a reduction in the balance sheet would pull cash from the system and could slow M2. At a minimum, it would lower the monetary base (currency in circulation + bank reserves).
| Table 13: Money Supply Growth |
| |
M2 Money Supply 13-week annualized growth |
| 1/4/2021 |
16.7% |
| 1/11/2021 |
17.9% |
| 1/18/2021 |
15.9% |
| 1/25/2021 |
14.6% |
| 2/1/2021 |
12.6% |
| 2/8/2021 |
11.5% |
| 2/15/2021 |
12.0% |
| 2/22/2021 |
12.9% |
| 3/1/2021 |
13.0% |
| 3/8/2021 |
12.7% |
| 3/15/2021 |
14.7% |
| 3/22/2021 |
17.5% |
| 3/29/2021 |
18.5% |
| 4/5/2021 |
21.7% |
| 4/12/2021 |
18.8% |
| 4/19/2021 |
19.6% |
| 4/26/2021 |
18.8% |
| 5/3/2021 |
19.0% |
| 5/10/2021 |
20.0% |
| 5/17/2021 |
18.8% |
| 5/24/2021 |
14.5% |
| 5/31/2021 |
13.6% |
| 6/7/2021 |
14.5% |
| 6/14/2021 |
13.3% |
| 6/21/2021 |
7.4% |
| 6/28/2021 |
4.8% |
| 7/5/2021 |
4.2% |
| 7/12/2021 |
5.3% |
| 7/19/2021 |
5.8% |
| 7/26/2021 |
8.1% |
| 8/2/2021 |
8.2% |
| 8/9/2021 |
7.7% |
| 8/16/2020 |
8.0% |
| 8/23/2021 |
11.3% |
| 8/30/2021 |
10.9% |
| 9/6/2021 |
10.9% |
| 9/13/2021 |
10.0% |
| 9/20/2021 |
11.0% |
| 9/27/2021 |
10.2% |
| 10/4/2021 |
10.8% |
| 10/11/2021 |
11.3% |
| 10/18/2021 |
12.3% |
| 10/25/2021 |
11.1% |
| 11/1/2021 |
11.5% |
| 11/8/2021 |
11.7% |
| 11/15/2021 |
11.8% |
| 11/22/2021 |
12.9% |
| 11/29/2021 |
12.8% |
| 12/6/2021 |
12.6% |
Source: St. Louis Federal Reserve
M2 = Cash + checking accounts + savings accounts + CDs + Money Mkt Funds + Mutual Funds
M2 avg growth rate since 1981: 6.7%
The pendulum swings from disinflation to inflation
There are two important measures of inflation that investors keep tabs on—the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE Price Index). Both are broad-based. The Fed favors the broader PCE Price Index.
Over much of the last decade, the rate of inflation failed to consistently reach the Fed’s goal of 2%. That changed abruptly last year, with inflation soaring well above the Fed’s target.
Headline inflation has risen faster than core inflation, which excludes food and energy. Simply put, food and energy have been rising at a faster pace, lifting the headline number above core inflation.
At 4.7%, however, the core PCE Price Index highlights that inflation has crept into the broader price level.
Analysts cite supply chain disruptions, an easy monetary policy, strong demand fueled by fiscal stimulus, and the pandemic, which has distorted buying patterns that favor goods.
With the public and investors focusing on inflation, let’s review one more metric. The Federal Reserve Bank of Dallas calculates what’s called the ‘trimmed mean.’ The trimmed mean trims the outliers, both on the high side and the low side.
It helps to determine whether inflation (or, for that matter, very low inflation) has crept into the broader price level or is simply tied to a few items.
In four short months, the year-over-year trimmed mean rose from 2.0% to 2.8%, well above the Fed’s target.
We would expect the 1-month annualized trimmed mean to be more volatile because the Dallas Fed is simply annualizing each month’s number.
While it can be noisy, it can also pinpoint trends faster than the year-over-year figures, as illustrated in Table 14.
As reflected in the table, the 1-month annualized rate rose above the Fed’s 2% target in February and trended higher during the year.
| Table 14: Key Measure of Inflation |
| |
PCE Price Index y/y |
Core PCE Price Index y/y |
PCE trimmed mean y/y |
PCE trimmed mean 1-month annualized |
| Jan 2021 |
1.4% |
1.5% |
1.7% |
1.1% |
| Feb |
1.6 |
1.5 |
1.7 |
2.4 |
| Mar |
2.5 |
2.0 |
1.7 |
2.1 |
| Apr |
3.6 |
3.1 |
1.8 |
2.5 |
| May |
4.0 |
3.5 |
1.9 |
2.9 |
| Jun |
4.0 |
3.6 |
1.9 |
2.3 |
| Jul |
4.2 |
3.6 |
2.0 |
2.9 |
| Aug |
4.2 |
3.6 |
2.0 |
3.0 |
| Sep |
4.4 |
3.7 |
2.3 |
4.5 |
| Oct |
5.1 |
4.2 |
2.5 |
4.0 |
| Nov |
5.7 |
4.7 |
2.8 |
4.3 |
Source: St. Louis Federal Reserve, Dallas Federal Reserve, Nov 2021