**Daily Market Recap:**
• Stocks gave up early gains and finished the day lower. A rotation out of growth and into value continues as technology comes under further pressure. News released Thursday showed that U.S. GDP grew 6.9% in the fourth quarter, closing out a strong year for economic growth. Asian shares were down after the Federal Reserve rate-hike comments, but European stocks were higher. Earnings season continues this week after seeing strong results from Tesla and Microsoft earlier in the week.
• It turns out that 2021 saw the highest yearly growth in GDP since 1984, following lockdowns and negative growth in 2020. Consumer spending, the lion’s share of the economy, continued to grow in the fourth quarter. At the same time, businesses also increased spending to rebuild depleted inventories and resume capital investment after a lull for much of the pandemic. The news is further evidence that the omicron variant has had far less of an impact on the economy than initially feared and likely supports the Fed’s decision to raise rates and reduce the balance sheet aggressively. We think solid fourth-quarter growth will continue for much of 2022, albeit at lower levels, before moderating closer to the long-term average in 2023. Falling coronavirus hospitalizations and supply-chain corrections could further support our view in 2022.
• While Fed tightening is likely to continue to weigh on valuations, we believe that this headwind can be offset by rising corporate earnings, as has happened in the past. In each of the last five rate-hike cycles since 1985, the S&P 500 generated moderate but positive returns between the first rate hike and the previous, supported by a growing economy and rising earnings. Considering a solid labor market, robust consumer finances, and the pent-up consumer demand for services, as well as the ramp-up, incorporate share repurchases, we expect earnings to continue to rise despite profit margins likely peaking. Elevated volatility could persist, but given the still-solid fundamental backdrop and not yet restrictive Fed policy, the recent pullback and any further potential weakness could present a compelling opportunity for investors, in our view.

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