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December 3, 2021 ▫️ Market Update

November began with stocks setting another record high, but the month ended with the market in retreat. The S&P 500 closed out November down 0.8 percent. Once again, familiar issues are to blame — from the coronavirus to concerns about the Federal Reserve’s next steps and supply chain disruptions.

Inflation also remains a significant theme as strong demand for raw materials, logistical challenges, and labor market tightness means price hikes at manufacturing and retail levels. It’s also top of mind for consumers who grapple with things getting more expensive.

In response, the Federal Reserve is expected to accelerate its tapering program — a lever to rein in inflation — after it meets later this month. For much of the year, Fed Chair Jerome Powell described inflation as “transitory,” but now says that outlook was overly optimistic and it’s “probably a good time to retire that word.”

While higher prices may curb some spending for consumers this holiday season, supply chain issues could also impact purchases. More information will be available in this month’s retail sales report, scheduled for release on December 15.

The new Omicron coronavirus variant also affected crude oil prices, driving them to the biggest monthly loss since early 2020. Before news of the variant, several countries, including the United States, responded to rising oil prices by planning to release several million barrels of oil from strategic reserves.

On a positive note, industrial production rose in November, as did sales of new and existing homes. In addition, more than 500,000 new jobs were added, and weekly claims for unemployment insurance fell to their lowest level since 1969.

November also saw an increase in Treasury yields — which often track with expectations for the economy’s strength. Investors feel less need to own Treasuries — considered the safest possible investment — when the economy is healthy.

Hilltop Advisors' Perspective

For much of 2021, corporate earnings have been great, with limited volatility and profit margins holding up in the face of inflation. The S&P 500 remains up over 21 percent for the year. And we believe gains will continue between now and well into 2022.

Our forecast comes even as concerns grow about the effect of a new coronavirus variant clouding the picture, at least in the near term. We think growth will slow a bit next year, but it’s still going to be stronger than the trend — and that’s likely to extend the bull market. We also believe corporate earnings will improve rather than worsen over the next six months.

Although higher costs from supply chain disruptions and labor have prompted warnings, many companies, so far, have been able to pass costs on to consumers. Moreover, as inflation risks increase, the Federal Reserve signaled it would consider speeding up its withdrawal of bond purchases when it convenes on Dec. 14 and 15.

(In November, the Fed began reducing its Treasuries and mortgage-backed securities purchases. The program was introduced to ease the economy through the pandemic.)

We think it’s a conundrum for the Fed. The current situation puts more pressure on them to find the right timing for tapering and raising interest rates, but they can’t move too quickly to take the wind out of the sails of the recovery.

Of course, inflation isn’t only a Fed worry. With our December adjustments, we dialed down fixed income as their value erodes with inflation. In addition, we slightly reduced equity exposure, but only slightly, as we continue to seek income generation from dividend-paying stocks.

Helios’ investment models are designed to reduce risk while seeking maximum returns within your tolerance level. Our partnership with Helios allows us to concentrate on data and research instead of intangibles. Their complex quantitative strategies help us make asset allocation decisions based on market volatility.

When volatility declines, the level of risk-taking in portfolios we manage goes up. When volatility increases, it goes down.

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The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice. Hilltop Wealth Solutions is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training. While efforts are made to ensure information contained herein is accurate, Hilltop Wealth Solutions cannot guarantee the accuracy of all such information presented.

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