High-growth, high-multiple stocks took a pounding last week as investors seemed to be eyeing up rising interest rates heading into 2022 (and perhaps engaging in some tax-loss harvesting). At least this was the predominant narrative heading into the end of the week. But when markets opened for a shortened day of trading on Black Friday, fears of the omicron variant of the coronavirus pulled all three major indices lower.
The World Health Organization on Friday classified the omicron a “variant of concern” due to its high number of mutations, which gives it potential to be more transmissible than other variants or evade vaccines and therapeutics. Experts fear the variant is behind a sharp upswing in coronavirus cases in South Africa, where omicron was first identified.
We’ll learn a lot about the omicron variant in the coming days, and we’ll let public health experts lead that discussion. For now, we’ll stick to our wheelhouse: breaking down the market and economic significance of this new uncertainty. From our perspective, we’ve seen other variants of concern rise to the fore and cases ebb and spike through the past almost two years. While these variables remain unpredictable in their scope and timing, we remain confident we aren’t going back to March 2020. Yes, the omicron variant prompted new COVID restrictions in some parts of the world, particularly limiting travel from South Africa. That was enough to spook markets Friday, as investors may have had flashbacks to 2020.
But we’ll remind investors (as we have through prior spikes and through the delta variant) that the world has built a resilient framework for addressing the pandemic. Vaccine manufacturers aren’t starting from scratch, for example, and they’re already studying the new variant and whether tweaks to their formulations will be needed. The economy, entailing both consumers and businesses, has adapted to these conditions time and again. Certainly, there are health concerns with this new variant, but we don’t believe significant economic disruptions will result. We’ve simply come too far since March 2020.
With that said, let’s look at the other highlights from last week and prepare you for the week ahead.
Wall Street Wrap
Global PMIs strengthen: IHS Markit PMIs around the globe, perhaps surprisingly, strengthened in November. We say “surprisingly” because we’re seeing COVID-19 cases rising in the eurozone, and subsequent restrictions to limit its spread could potentially dent growth. However, that hasn’t yet been reflected in the data. Rather than declining (as largely expected), the Eurozone Composite PMI rose to 55.8 in November (anything above 50 is considered expansion), compared to 54.2 the month prior, with both manufacturing and services sectors rising. Maybe there’s some timing factors here with COVID-19 impacts not showing up yet, but it certainly appears that global economic activity remains strong.
Here in the U.S., growth took a small step back. The U.S. Composite PMI was at 56.5 in November, from 57.6 the month prior. Manufacturing accelerated, while services took a small step back. A decline, sure, but insignificant — and overall economic activity is still in good shape.
“The U.S. economy continues to run hot — while, overall, business cooled,” Chris Williamson, chief business economist at IHS Markit said. “Growth remains above the survey’s long-run, pre-pandemic average as companies continue to focus on boosting capacity to meet rising demand.”
And the rest: U.K. composite PMI remained steady at 57.5, while Australia rose from 52.1 to 55 in November. Finally, we saw Japan composite PMI reach 52.5 versus 50.7. All around, growth is strong heading into a few (likely temporary) COVID disruptions.
Inflation comes in as expected: Personal Consumption Expenditures (PCE) and Core PCE, the Fed’s preferred inflation metric, were largely in line with expectations in October. PCE was up 0.6 percent month over month in October versus a 0.7 percent rise the prior month, which puts that measure at 5 percent year over year. That’s slightly lower than the 5.1 percent rise that was forecast.
Core PCE, which strips out more volatile components like food and fuel, rose 0.4 percent month over month and 4.1 percent year over year. Larger view, inflation is being driven by spending on goods over services. When you combine durable goods and non-durable goods, inflation here is 7.5 percent year over year. That figure was never above 1.4 percent from late 2012 to just before the pandemic and was even negative for many of those years. Durables inflation is up 8.8 percent right now, but from 1995 to 2020 prices never rose on a year-over-year basis. We expect a return to the mean going forward, as spending shifts back to services and supply and demand normalizes.
Status quo on the Fed: We learned Monday President Joe Biden nominated current Fed Chair Jerome Powell to lead the central bank, with Lael Brainard pegged to move to vice chair, replacing current Vice Chair Richard Clarida. Biden is expected to nominate three additional board members to fill vacancies, but we don’t anticipate Biden will pick anyone controversial or hawkish. Markets liked the continuity here. We know what to expect from Powell; we’ve got a pretty good grasp of his approach to markets and can reasonably forecast what he will do. He’s built credibility with markets, which is incredibly important going into 2022, when tapering and a rate hike or two are potentially on the docket as policy returns to “normal,” — or the new normal as defined by Powell.
The week ahead
Here’s how your week is shaping up:
- Monday: Pending home sales for October will be released in the morning. September pending sales were down 2.3 percent, but fall and winter aren’t top home-buying seasons.
- Tuesday: Consumer confidence for November is due, and given the spending and strength in the labor market, we expect a pretty good print this week. While inflation is sticking around, it doesn’t seem to be discouraging spending. What’s more, news that supply chains are smoothing, product is indeed on shelves (at the biggest retailers in the U.S.) and big policy debates from Washington are nearing the finish line could further bolster confidence.
- Wednesday: The ISM manufacturing index, construction spending and the Fed’s Beige Book will paint a picture of economic activity in the U.S., particularly concerning backlogs, productivity and more.
- Friday: The week closes with a bang, as nonfarm payrolls, unemployment data, factory orders and the ISM services index all drop.
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