Looking Ahead - Wells Fargo Advisors

Investment Implementation Jennifer Timmerman, Market Advice Associate

Angela Shin, Market Advice Associate December 17, 2021

Looking Ahead

U.S. stocks strolled down different paths this week, with the S&P 500 drifting from a record peak. A flurry of global central bank policy decisions garnered attention as inflationary pressures remained in focus. The U.S. Federal Reserve (Fed) heralded a new era of monetary policy with its widely anticipated hawkish pivot, as policymakers indicated the economic recovery remained solid despite lingering pandemic uncertainty. While the more traditionally defensive equity sectors outperformed, the week was no walk in the park for mega-cap tech shares.

S&P 500 index performance week of December 13-17

Source: Bloomberg *As of December 17, 2021 12:30 p.m. ET. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment.

Heading into Monday's session, the S&P 500 was perched at a fresh all-time high. The broad benchmark was coming off its best week since February (+3.8%) as positive pandemic headlines had bolstered risk appetite. Preliminary data had suggested the Omicron COVID-19 variant caused relatively milder infections than originally feared, while initial studies supporting the efficacy of current vaccines were also encouraging. Market participants had largely brushed off another hot inflation reading, as stocks advanced on Friday (December 10) despite the Consumer Price Index (CPI) climbing at the fastest annual pace since 1982 (+6.8% year-over-year) in November. The optimism was short-lived, however, as investors struck a cautious tone ahead of key monetary policy decisions from central banks around the globe. U.S. equities fell on Monday and Tuesday, with the S&P 500 slipping a combined 1.7% over

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December 17, 2021

the course of the two sessions. The more traditionally defensive sectors bucked the downtrend, however, with Health Care and Consumer Staples among the standouts--a trend that carried through the week. Bespoke Investment Group noted

that the Consumer Staples sector was positioned for its strongest monthly performance since 2000, as the group was up 8.5% month-to-date through Thursday's close.

Defensive stocks outperform in December

Bloomberg *As of December 17, 2021 12:30 p.m. ET. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment.

The major averages traded lower for much of Wednesday morning, too, amid jitters around the Fed's meeting. But stocks turned sharply higher in the afternoon as the U.S. central bank's hawkish pivot turned out to be well-received by Wall Street. The S&P 500 jumped 1.6% for its best performance on a Fed decision day in 13 months. As widely expected, Federal Open Market Committee (FOMC) officials announced plans to double the pace of tapering its bond-buying program in an effort to aggressively fight ongoing price pressures--now deemed the biggest risk to the U.S. economy by Fed Chair Jerome Powell. This move set the stage for monetary tightening in the coming months, but also removed a source of uncertainty for markets ahead of year-end. Pandemic-era asset purchases would likely end in March, opening the door for subsequent rate hikes. Also in focus was the FOMC's dot plot, which showed a majority of policymakers penciling in three or more 25-basis point (0.25%) rate increases next year, a marked shift from the previous release in September that had indicated committee members were evenly split for rate lift-off in either 2022 or 2023.

According to Bloomberg, some on Wall Street suggested that Wednesday's equity rally was at least partly due to option traders unwinding hedges that had been in place as some market participants had braced for a worse outcome, in terms of a more hawkish surprise. Meanwhile, the reaction from the Treasury market seemed to indicate the Fed's policy pivot had been priced in. Though government bonds edged slightly lower on Wednesday (sending yields modestly higher), Treasuries

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actually climbed on the week, with the yield on the benchmark 10-year note poised to fall 10 basis points to 1.39% since last Friday's (November 10) close. (100 basis points equals 1%.) Also peculiar were signs of the overall yield curve steepening somewhat, as the gap between the five-year note yield and the 30-year bond yield expanded to as much as 70 basis points, the widest margin since the end of November. Analysts highlighted lingering pandemic uncertainty as a factor keeping yields generally depressed, with the Fed's forecast of three potential rate hikes in 2022 possibly overzealous after all.

Comparison of U.S. Treasury yields quarter-to-date

Bloomberg *As of December 17, 2021 8:30 a.m. ET. Past performance is no guarantee of future results.

The perceived "risk on" tone in the equity market Wednesday proved to be just a blip in the week, as a rout in mega-cap and tech shares dampened the mood. The S&P 500 slid 0.9% on Thursday, while the Nasdaq Composite posted its worst day since September, slumping 2.5% amid a sell-off in growth-related stocks. Weak earnings from big tech companies pressured sentiment, with Adobe experiencing its largest single-session drop since March 2020, shedding more than 10% following a disappointing sales forecast. Meanwhile, mega-cap names Apple and Microsoft also weighed on the broader market, with the two titans heading for their biggest weekly declines since February of this year and October 2020, respectively. Once again, the prospect of tighter monetary policy was cited as a headwind to growth shares, as the valuations of these companies are derived from future cash flows, which would need to be discounted at a higher interest rate. Across the pond, central banks took their own steps to remove pandemic-era stimulus. The Bank of England (BOE) opted to raise its benchmark lending rate, while the European Central Bank (ECB) voted to temporarily increase its asset purchases in order to smooth the winding down of its emergency debt-buying program.

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The CBOE Volatility Index (VIX) bounced from a three-week low amid triple witching on Friday--the simultaneous expiration of stock options, index options, and index futures that occurs each quarter. Meanwhile, the rebalancing of major indexes added to market turbulence. Bloomberg highlighted that the convergence of these two events has often made this Friday one of the most volatile trading sessions of the year, with the S&P 500 having ended in negative territory for seven straight triple witching dates. The trend looked to continue, with the broad benchmark headed for a weekly loss of 1.7% as of 12:30 p.m. ET. The Nasdaq Composite was poised to tumble 3% for the week, bringing the tech-heavy index about 5.5% below its most recent November 19 record close. The Dow was set to slip 1.5% on the week, as mixed Omicron headlines renewed concerns surrounding pandemic restrictions, adding pressure to the more cyclical and value-oriented pockets of the market. The small-cap Russell 2000 Index was on course for a 1.8% decline, remaining in correction territory (defined as a 10% drop from a recent peak).

S&P 500 Sector Performance with FAAMG*

Bloomberg *As of December 17, 12:30 p.m. ET *FAAMG represented by an equal weight portfolio of Meta Platforms (formerly known as Facebook), Amazon, Apple, Microsoft and Alphabet. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment.

Economic data this week seemed to support the Fed's view that the U.S. economy remained on solid footing, though inflation readings remained elevated. A report showed producer prices rose at the fastest clip since July last month (+0.8%), while the headline figure surged at a record 9.6% annual rate in November. Separately, U.S. retail sales increased 0.3% in November, the smallest gain in four months. However, analysts suggested that the weak print was possibly due to consumers wrapping up holiday shopping earlier this year amid concerns of ongoing supply chain disruptions, hence October's strong number, which was upwardly revised to reflect a 1.8% monthly advance. Meanwhile, weekly initial jobless claims came in at 206,000, up modestly from the previous 188,000 figure that had marked a 52-year low, but still a reading that pointed to a tight labor market. Additionally, flash December surveys from research firm Markit revealed that growth in both the U.S. manufacturing and services sectors unexpectedly decelerated, though both remained firmly in expansionary territory. Other releases revealed housing starts surged at the fastest pace in eight months in November (+11.8%), while building permits jumped 3.6% during the period.

In corporate news, Cerner was the top-performing S&P 500 constituent this week, rallying nearly 20% on reports that Oracle was mulling the acquisition of the healthcare information technology company in a deal that could be worth roughly $30 billion. Elsewhere, Pfizer and Moderna outperformed after the Center for Disease Control and Prevention (CDC) said they preferred the COVID-19 vaccines from these two companies over Johnson & Johnson's single-shot inoculation. In

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earnings, FedEx climbed into positive week-to-date territory after delivering strong results that included an increase to its full-year outlook, along with a top and bottom line beat as the company raised its shipping rates to help offset higher expenses. Elsewhere, Lennar Corp. shed double-digits (in percentage terms) on worse-than-expected results as the homebuilder continued to weather elevated lumber and labor costs, along with raw materials shortages. Meanwhile, Eli Lilly jumped over 9% following a boost to its forward guidance.

Looking Ahead to Next Week: December 20-24

Next week investors will digest a deluge of economic data before taking off for the long holiday weekend. (The NYSE is closed on Friday, December 24 in observance of Christmas, which falls on a Saturday this year.) An update on consumer spending will likely garner attention Thursday, with personal spending expected to have advanced 0.6% in November after the prior reading (+1.3%) had represented the largest increase since March. Personal income is anticipated to have risen 0.4% during the month. Also in focus, the core PCE deflator (the Fed's preferred proxy for inflation) is forecasted to have surged 4.5% year-over-year in November, accelerating from October's 4.1% annual pace that had marked the biggest jump in three decades. Separately, the Conference Board's gauge of consumer confidence is projected to rebound in December to 110.8 from a nine-month low of 109.5. In the real estate realm, both existing and new home sales are expected to have climbed in November. Rounding out the docket will be the leading index of economic indicators, the Chicago Fed's national activity index, reports on durable and capital goods orders, weekly initial jobless claims, a third and final reading on U.S. third-quarter GDP (gross domestic product), and an update on consumer sentiment from the University of Michigan. In earnings, some notable companies posting profit tallies include: Nike, CarMax, Micron Technology, and General Mills.

Disclaimers

Ticker

Price

Ticker

Price

NKE GIS MSFT JNJ LLY

$162.72 $68.86 $324.90 $173.01 $279.04

KMX ADBE PFE FDX CERN

Source: Bloomberg *As of December 16, 2021, 4:00 p.m. ET

$137.40 $566.09 $61.25 $238.52 $79.49

Ticker

MU AAPL MRNA LEN ORCL

Price

$82.69 $172.26 $282.02 $108.46 $103.22

All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. Dividends are not guaranteed and are subject to change or elimination. Additional information available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice.

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