Paul Tarins, RICP®,WMCP®,CSRIC™
November Recap: Omicron Delivers a Real Turkey
The first weeks of November saw stocks continue their race higher towards historic valuations. Supporting the move was the on-going economic reopening narrative reinforced by passage of the $1 trillion Infrastructure Bill, and newly announced pill-form Covid-19 therapeutics. However, about mid-month small-cap stocks began to struggle. The irony was that they had just recently broken out of a near six-month sideways trading range. Later in the month, large-cap stocks also slowed their ascent on narrowing upside participation.
The real drama occurred during the holiday-shortened Thanksgiving week. Typically, this is an extremely positive period for stocks. However, instead of an easy-going holiday, markets got a real turkey. Here are the highlights driving this recent bout of volatility:
- The day before Thanksgiving, Jerome Powell was nominated for his second term as Chair of the Board of Governors of the Federal Reserve System (The White House, “President Biden Nominates Jerome Powell…,” 11/22/21). One may have thought that the implied stability of a renomination would have been supportive of markets. That thinking was correct early in the session, but quickly faded on the premise that Powell will in fact be more hawkish than his presumed alternative, Dr. Lael Brainard (nominated as Vice Chair).
- The day after Thanksgiving, the Omicron coronavirus variant hit national headlines precipitating a 900-point Dow Jones Industrial Average decline, the worst daily plunge of the year (Yahoo! “Market Strategists Split…,” 11/26/21). The first documented case in California the following week led to further volatility.
- Chair Powell pivoted on his inflation stance during recent testimony to the Senate Banking Committee, suggesting it may no longer be “transitory,” and that the tapering of quantitative easing may be accelerated, implying the Federal Reserve may raise rates sooner than previously thought (CNBC, “Powell’s Pivot on Inflation…,” 12/1/2021).
- The November jobs report came in light early in the new month, with just 220,000 non-farm jobs added versus an expected 550,000 (Yahoo!, “November Jobs Report…,” 12/3/21). While there were also positive aspects to the report, including upward revisions to prior months and falling unemployment, this has raised the prospect that the Federal Reserve may actually be making a policy error in accelerating the withdrawal of stimulus.
For all the above, the economy remains robust. US factory orders recently rose more than expected, US service activity is at all-time highs, shipping delays are shortening, and strong retail sales have been recorded. Further, while it could be weeks until we have an accurate picture, early anecdotal evidence is that Omicron, while easily spread, may be more mild than other variants even as vaccine makers have claimed they can develop targeted shots in a staggeringly brief period of three to four months.
Outside of large-cap technology, the rest of equities experienced significant decline in November:
Global Asset Class Returns November 2021
As shown, US large-caps fell about -0.8% (‘SPY’ ETF Proxy), with small-caps and overseas indices all down over -4% for the month. Among other asset classes, fixed income offset negative stock performances, while commodities gave back a portion of their outstanding annual gains, -8.8% (‘DBC’). Year-to-date, the picture remains rosier for stocks with US large-caps still higher by +23% (‘SPY’), although emerging markets have fallen into the red, led by China. Bonds also remain slightly negative for modest annual balanced portfolio results
With markets still “priced for perfection,” it may be time for prices to let a little air out of the tires going into year-end given fresh uncertainties and the prospect of a hawkish Federal Reserve. However, we believe that the economy remains sound, and that stocks should likewise remain favorable. We will continue to monitor markets daily, and in the meanwhile wish you a wonderful and warm holiday season.
Source: Index proxies based on ETF time-series data from CSI Data, Inc. Data deemed dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.