Omicron Variant Casts a Shadow of Uncertainty on Financial Markets
Concerns about the new variant of COVID-19 have put Main Street and Wall Street on edge. The fast-spreading Omicron variant of the Coronavirus moved across continents and on to U.S. soil in a matter of days. Stock price volatility elevated just as quickly, with the VIX index spiking through 30 for only the second time this year, the largest monthly surge since February 2020.
Fears of this magnitude can be very challenging to price into financial markets. If COVID cases continue to rise, leading to increased restrictions, ongoing supply shortages and a potential return to business shut-downs, company profits will, of course, suffer and perhaps some of the rerating of certain stock valuations is justified. If, however, the new variant is successfully contained and vaccines either prevent infection or lesson severity, then perhaps certain stocks which sold off steeply in the final days of the month offer particularly attractive value.
As we learned at the beginning of the pandemic and subsequent months to follow, one thing we should expect to see is investor overreaction to virus-related news, both good and bad. Experienced investors will be patient with portfolio positions and focus on their long-term company outlooks rather than jumping in and out of (COVID-fear induced) volatile stocks.
|Market Index Returns||November 2021||YTD 2021|
|S&P 500 Index||-0.7%||23.2%|
|Russell 2000 Index||-4.2%||12.3%|
|MSCI EAFE Index||-4.7%||5.8%|
|Bloomberg U.S. Agg. Bond Index||0.3%||-1.3%|
|FTSE 3 Mo. T‑Bill Index||0.0%||0.0%|
Stock Market Review & Outlook
Stocks Continued to Reach New Highs Before the Post-Thanksgiving Sell Off
Despite the modest pullback in the return of the S&P 500 in November, the index continued to set new highs during the month, recording a remarkable 66 new record closing highs for the year through mid-month. This is the most in a single calendar year since 1995. The more growth-oriented sectors such as Information Technology and Consumer Discretionary held on to positive returns during the month. Semiconductor chip makers held up during the month as robust demand remained during a period of ongoing supply constraints.
More cyclical sectors such as Financials and Energy were the weakest. Oil prices pulled back amid worries rising COVID cases could reduce demand. Both small cap and non-U.S. stocks underperformed as well during the risk-off period. The yield on the bellwether 10-Year U.S. Treasury Note declined 11 basis points to 1.45% as prices rose for safe-haven assets toward the end of the month.
|S&P 500 Sector Returns||November 2021||YTD 2021|
Economic Review & Outlook
Unemployment Continues to Fall While Inflation Rises
The number of unemployed Americans per job opening hit a record low during the month of November as shown in the chart below. The headline unemployment rate dropped to 4.2% in the month, a level we haven’t seen since the start of the pandemic. The Labor Force Participation Rate (which pulled down unemployment levels earlier in the year as weary older workers called off their job searches in favor of retiring) ticked back up to the highest reading since March 2020. The lack of available workers per job openings is more telling of just how tight the labor market is when you consider that the U.S. economy is still 3.9 million jobs short of the level we had in February 2020.
Year-on-year comparisons of inflation levels continue to rise. Personal Consumption Expenditures (PCE) remain stubbornly high, with the October data reported last month at 5% and Core PCE (excluding volatile food and energy) higher by 4.1%, driven by a higher than anticipated monthly rise. This is the Fed’s stated preferred inflation data series, so it is likely to evoke ample discussion at the next Federal Open Market Committee (FOMC) meeting. In his latest comments, Fed Chairman Powell acknowledged that the risk of higher inflation has increased but expects the reading to fall closer to the targeted 2% level in 2022. Even so, he made a key language change by stating he was retiring the word “transitory” in inflation discussion.
Chart of the Month
Unemployed Americans Per Job Opening
There are once again more available jobs than unemployed Americans searching for work. Job seekers relative to available positions hit a record low last month as the labor market continues to tighten.
Fed Chairman Jerome Powell has been appointed to a second four-year term by President Biden. In his latest public comments, the Chairman has become a bit more aggressive in his tone on the speed at which Fed bond purchases, a known accelerant to an equity market on fire for the past 20 months, will be pared back. Even if the monetary stimulus punch bowl is taken back more quickly than planned, fiscal spending will continue to be a formidable tail wind to the economy and asset values. The much debated $1 Trillion public-works infrastructure bill was passed last month and the $1.75 Trillion Build Back Better Act is teed up to be voted on before year end, testing the limits of how much stimulus can be infused into an economy in a short period of time. Standing at over $29 Trillion, the national debt counter is moving at a disconcerting pace
Despite being bumped from the top headlines, after kicking the can down the road in October, Washington once again finds itself up against a debt ceiling deadline in mid-December. The risk of a U.S. default on its debt and potential credit downgrade has serious repercussions that would be felt in financial markets throughout the world. Expect pressure from Treasury Secretary Janet Yellen on the matter and politicians on both sides of the aisle to come down to the wire once again with a decision on raising or suspending the limit.
I am hopeful that you were able to spend some quality time with family over the Thanksgiving holiday. Our team at Plimoth continues to be extremely thankful for our partnership with you, our valued clients. Please reach out to one of your Account Officers or any member of our Executive Leadership Team to discuss topics raised in this letter or anything else we can be helpful with.