The Navigator | December 2021
Pausing the 2021 uptrend, the S&P 500 recorded a mild negative 0.73% return while the Dow Jones Industrial Average experienced a loss of 3.5%. In contrast, the Nasdaq continued with a significant positive return at 1.9%. More notable intra-month was the sudden emerging concern of the new Covid variant Omicron, which negatively impacted the stock market on November 26.
The fast-spreading new variant brought global markets down, with the S&P 500 down 2.3%, the Stoxx Europe 600 down 3.7% and the Russell 2000 recording its largest one-day drop since February. The VIX index jumped 10 points to 28 – its highest level also since February. Government bond yields continued to drop, with the yield on the 10-year US Treasury falling to 1.43%. Front-month oil prices, which are more sensitive to near-term demand risks, decreased by 13%. Re-opening industries such as airlines were among the worst-performing groups, with the US Global Jets Index down 7.2%. Notably, shares of vaccine maker Moderna posted gains of more than 20% on the same day.
The long-term impact of the Omicron variant on the economic outlook is still unclear, although the early signs have pointed to elevated risk with respect to vaccine efficacy. With incomplete information, we believe this new strain is cause for concern but not panic. It will likely take several weeks for scientists to determine the efficacy of antibodies, vaccines, and pills on the new variant. High vaccination rates and upcoming antiviral medications provide confidence that better preparedness will result in limited market downside long-term.
Inflation concerns are still present, with the CPI rising 0.9% in October, more than economists’ consensus of a 0.6% increase. Inflationary pressures are likely to linger for a while due to global supply-chain issues and rising energy prices. Inflation levels continue to overshoot expectations, with hopes of any reduction from current levels expected sometime in 2022. This is predicated on the easing of supply-chain constraints and lower energy prices out of the next OPEC meeting.
On November 30, Federal Reserve Chairman Jerome Powell appeared before a Senate Committee to discuss balancing temporary inflation concerns and the Omicron variant impact on supply-chain disruption, while reiterating the Fed’s commitment to support a full recovery in employment and a price-stability goal. This testimony provided additional reassurance that central banks will remain patient in tightening policy, even with inflation elevated. The bond market reaction appeared to reflect that news with yields tumbling and failing to rally back despite subsequent positive developments.
We continue to advise clients against adjusting their investment strategy in reaction to market movements. We believe the market reactions may have been exacerbated by relatively low liquidity during Thanksgiving week, and volatility could remain elevated in the days to come.
NorthCoast Navigator
↓ Valuation | U.S. equity valuations remain steady throughout November, dipping slightly due to the minor pullback.
↔ Sentiment | Consumer sentiment fell in November to its lowest level in a decade due to an escalating inflation rate.
↑ Technical | Technical indicators remain in positive territory. The VIX level settled at 27.2 at the end of the month, compared with 16.3 at the end of last month.
↑ Macroeconomic | There was little change in Macroeconomic indicators from last month. Positive news of recovery with unemployment remaining historically low at 4.6 while CPI rose sharply to 6.2 from 5.4.
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As of 11/30/2021
1 Source: Bloomberg, WSJ, NorthCoast Asset Management.
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