Monthly Market Summary
- The S&P 500 Index of large cap stocks produced a -0.8% total return during the month of November, outperforming the Russell 2000 Index’s -4.3% total return.
- Tech’s +4.5% return made it the top performing sector, followed by Consumer Discretionary’s +1.6% return. Communication Services -6.1% return qualified as the worst performing sector, with Financials close behind at -5.7%.
- Investment grade bonds generated a -0.1% total return, outperforming high yield bonds’ -1.2% total return.
- The MSCI EAFE Index of developed market stocks returned -4.5% during November, underperforming the MSCI Emerging Market Index’s -4.1% return
Omicron Variant Update
The newest Covid variant, Omicron, surfaced the last week of November. Omicron emerged in South Africa and is spreading rapidly, but the reality is that much is still unknown. It will take weeks of analysis and incoming case data to understand how much of a threat Omicron poses, such as transmissibility and disease severity. However, the few known details are raising concerns for health officials.
An initial review of Omicron's genomic sequence indicates it has picked up dozens of mutations, including those known to evade immunity and increase transmissibility. Health officials and researchers are concerned the high number of mutations may make Omicron more contagious and difficult to contain. Additionally, there is uncertainty about how much protection current vaccines provide against Omicron.
The Fed Changes Tune
Over the last 9 months, the Federal Reserve has been staunchly committed to it’s forecast that current inflationary dynamics were “transitory” and as a result maintained accommodative monetary policy through November of this year. With inflation numbers running well ahead of the Fed’s long-term target of 2%, policy makers have been slowly distancing themselves from that narrative.
Recently, the Federal Reserve announced it would begin trimming its pace of asset purchases and eventually raise interest rates by the middle of 2022 to combat rising prices. On November 30th, Jay Powell hinted that the Federal Reserve may increase the speed of tapering relative to expectations. In the same press conference, he stated “we should retire the word “transitory” effectively admitting his forecasts have been incorrect and inflation may be persistent. Later he backtracked, stating that wages are not rising fast enough to spark a longer term trend in inflation.
State of the Market
Markets are understandably nervous about Omicron and sold off quickly following the news as the original strain and its impact on markets is relatively fresh in investor’s minds. Riskier asset classes, such as small cap U.S. stocks, emerging market equities, and high yield corporate bonds, underperformed during the final days of November.
Interest rates declined as investors purchased U.S. Treasury bonds, while the yield on high yield corporate bonds rose as investors demanded more yield to compensate for a higher perceived level of risk. The price of a barrel of WTI Crude Oil plunged more than -15% during November on fears of decreased energy demand.
We believe a key leading indicator for the U.S. stock market will be Omicron cases in Europe. Covid data from earlier in 2021 regarding the Delta variant shows European Covid trends have generally led U.S. Covid trends by approximately 1-month. Initial cases in Europe suggests U.S. cases may rise in December. We caution the next few weeks will be full of speculation, but it is important to focus on the facts and data.
While the Delta variant slowed third-quarter U.S. GDP growth, economic growth remained positive. The Omicron variant may increase volatility and cause restrictions to be reimposed, but consumers and business may be more adept at navigating lock-downs.
Excluding the risks from potential virus-related news, the largest headwind will be the growth in corporate earnings relative to expectations in 4Q21/1H22 as businesses fight to maintain profitability in the wake of higher input and transportation costs. That said, we remain optimistic on equity markets in general due to a U.S. labor market that we believe still has significant room to recover and eclipse pre-pandemic levels.
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