The emergence of the new Covid variant spread was like a cloak of uncertainty wrapped around the Market this week. It’s just another reminder that we are still in a pandemic; As if we need one. The thing the Market hates the most is uncertainty. Appetite for risk has seemingly been held hostage to the volatility surrounding the Omicron headlines. It’s a waiting game for more data on the new virus variant and vaccine efficacy. The big fear is more lockdowns and another slowing of the global economic engine ahead of the Holidays. Investors don’t have much to go on as developments occur, so in true Market character, it’s sell first and ask questions later.
There has been a lot of selling of late. This week saw the worst back-to-back sessions on the year. Last week brought the worst Black Friday on Wall Street, ever. Ever is a long time. Keep in mind, the Friday after Thanksgiving is a half-day session, with very low volume. Volatility gets exacerbated in a thinly traded environment. But low volume or high volume, the results are the results. The new virus variant has shaken the Bull.
Some good news came from Washington this week. The Federal Government is going to stay open. This should never be a question for a Super Power. Unfortunately it’s become status quo. Congress averted another shutdown as the Senate passed a spending bill through mid-February. They, yet again, kicked that can down the road. But there’s still that debt ceiling yet to be resolved ahead of the mid-December deadline. Political games are less enjoyable than reindeer games.
The US Economy is growing but the Job Market slowed. There’s a huge disconnect. Demand keeps outstripping supply. ISM was hot. Job growth is not. Economic activity in the services sector grew in November for the 18th month in a row. It actually hit an all-time high, never stronger. On the flip side, only 210K Jobs were created in November, nowhere near the 550K expected. October was revised upward to 546K growth from the initial 531K report. The unemployment rate fell to 4.2%. This was the lowest monthly payroll reading since December of last year. It is certainly not for lack of demand.
Companies across the country are desperate to find workers to keep up with economic activity. That’s resulted in significant wage growth which has been another trigger for inflation. The thinking is that savings have been running their course and people will jump back into the labor pool in the weeks and months ahead. If participation fails to rise, the huge labor demand/supply imbalance will persist. That would force the Fed to hike multiple times next year. The Market won’t like that. It started bracing this week.
Federal Reserve Chair Powell finally acknowledged what the Market already knew. As it applies to inflation today, the word transitory is being retired. The taper, which means the reduction of Fed asset purchases, is accelerating faster than previously thought. The Market is now pricing in a 50/50 chance of the first rate hike in May. That is way ahead of the previous 2023 expectation. The Market got rattled by that news and has been recalibrating this week.
The OECD raised inflation estimates in America for 2022 to 4.4% up from previous 3.1% estimate set just in September. Europe is expected to see higher prices too, though at a slower pace, at 2.7%. They said the supply chain strain is still to blame. Just as things were loosening up with supplies to meet the super-strong demand, Omicron arrived. It’s caused another shock, though thus far minor, to the system. The thing is, when individuals and businesses face inflationary pressures, they tend to spend less or be more strategic in allocating their money. That leads to Market turbulence.
This recent sell-off is quite different than the Delta-driven decline in late Summer. Fast-growing Tech stocks are getting clobbered. Even companies with substantial growth opportunities ahead are seeing their stocks hit. Growth investments in general have been under assault. Fears of Covid and inflation are attacking high valuations. Taking the longer-term view, the panic selling creates an opportunity to buy low again. But things have to stop going down first. It’s a process. It’s definitely a risk-off environment.
With low interest rates and high inflation, money has largely flowed away from US Debt in 2021. That changed a little this week. The 10-Year Treasury yield fell back down to 1.3%. That’s a level last seen in the Summer. The decline is a definite sign of fear as well as caution. The Dollar strengthened too. It has our attention for the short-term. Caution is warranted.
The 30-Year Treasury yield broke below 2%. If you recall, lower yields mean higher prices. The opposite is true too. Buying that AAA Rated Bond would yield less than 1.7% per year for 3 decades. That small amount of income is not beating inflation. It certainly won’t help most retirement plans or get kids through college. Dividend stocks are much more compelling for those future needs.
Quality assets are back under huge demand. The Tech Titans fit that bill. Apple, Amazon, Microsoft and Google have been acting like the quality, safe haven securities that Treasuries usually provide. They’re core to a portfolio due to their reliability. Apple even lowered expectations for the new iPhone and the stock took the caution very much in stride. Buyers jumped on the initial price decline sensing opportunity and the stock ended the week higher than where it started. Bulletproof balance sheets and predictable business models make these Tech Titans as high quality as quality gets.
Shocks wear off. Time is usually what it takes. When you become more used to things, they become less shocking. It’s human nature. The Market has been dealing with outbreaks and new variants for 20 months now. Its resiliency has been so remarkable in the face of the many challenges throughout this stretch. This is yet another one. But we keep pushing forward. We will never forget the Spring of 2020. We are in such a better place. Life’s about overcoming challenges. You don’t always get what you want.
Living in Covid has required a different approach to pretty much everything we do. Lines are longer. Spacing is wider. Going out takes a lot more thought, and effort. But this Great American Growth Engine won’t stop. It can’t. It just evolves. Science and the Market are always moving. Past playbooks need adjustments. They need refining. Facing adversity is all about survival. Once you survive, you set your sites again to thrive. Success requires studying and understanding the now so we can be ready for what’s next.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
