Weekly Market Update Highlights
• Anxiety driven by the Omicron Covid-19 variant has gripped equity markets since Thanksgiving, but we are optimistic that its impact on economic mobility will be little more than a speed bump.
• Although November headline payrolls disappointed, stronger underlying trends suggest employment data may accelerate heading into 2022.
• The Fed’s recent rhetoric points to a more hawkish approach. In our view, the combination of an underwhelming jobs report and signs of decelerating inflation actually provides cover for continued patience.
The spread of the newest Covid-19 variant, Omicron, resulted in a selloff in developed equity markets last week. Among broad based indexes, the S&P 500 and tech-heavy NASDAQ lost 1.2% and 2.6%, respectively, while the DJIA lost roughly 1.0%. Abroad, the MSCI EAFE, EM and ACWI ex-USA indexes fell 1.0% and 0.7%, while the MSCI EM added 0.2%.
Market Drivers And Risks
• Omicron uncertainty drives volatility following Black Friday’s market swoon, as this new Covid-19 variant has now spread to nearly 40 countries.
• Mindful of the risks that the pandemic poses to the global economy, we continue to monitor key metrics including hospitalizations and mortality—both of which have remained subdued during these very early days of Omicron.
• Amid decelerating economic growth, contractionary monetary policy and the rise of the Delta variant, growth stocks have outperformed. That said, each new variant has had a diminishing impact on mobility. We therefore think cyclicals could play catch up should virus fears subside, while economic growth normalizes and inflation settles.
• Job creation once again fell short of expectations, leaving economists wondering what will lead to a recovery in employment, and when.
• While the addition of 210,000 jobs significantly missed most forecasts, a closer examination of the data provides a much more encouraging view. The household component of the survey, for example, indicated not only that 1.2 million more people were employed in November than in October, but also that roughly 500,000 individuals reentered the workforce. With the unemployment rate falling to 4.2% and weekly jobless claims remaining near multi-decade lows, there are good reasons to be confident in an ongoing labor market recovery.
• The Fed chose to adopt a more hawkish tone last week, driving up expectations for faster tapering.
• Even as U.S. Treasury yields and energy prices tumbled on fears of the unknown impacts of Omicron, expectations of accelerated contractionary policy reached new highs. Fed Chair Jerome Powell expressed a willingness to discuss an increased pace of tapering when the Fed meets in mid-December. Even with economic growth expected to reaccelerate, we have begun to see evidence of moderating inflation, which could ultimately leave room for the Fed to provide markets with a dovish rather than a hawkish surprise. A slower pace of rate increases would likely prove beneficial for equity markets.
Economic Week In Review
• Concern over the new variant of Covid-19 took its toll on equity trading last week. From a sector perspective, the “bond-proxy” sectors, utilities and real estate, were the only two sectors in positive territory, adding 1.0% and 0.1%, respectively. Relative outperformers included consumer staples (-0.3%) and technology (-0.4%). The largest underperformers were communications services and consumer discretionary, each shedding more than 2.0% for the week.
• While we await more information on the virulence of Omicron, as well as the effectiveness of current treatments in combating this variant, last week’s equity trading indicated a near-zero expectation for new economic restrictions, at least not in the U.S. In addition, President Biden indicated he has no plans for any federal shutdowns or lockdowns, and instead will focus on maximizing the number of Americans being tested and receiving booster shots.
Risks To Our Outlook
The full impact of the Omicron variant won’t be apparent for some time, so we expect volatility to spike with each related headline. Although another Covid-19 wave had been anticipated, the fear of economic restrictions might weigh on global equity markets.