/perspectives/weekly-viewpoint/omicron-fears-weigh-on-the-markets

Omicron Fears Weigh on the Markets

The major market indices finished the week lower with the S&P and Nasdaq declining for a second straight week while the Dow and Wilshire closed lower for the fourth consecutive week.

December 06, 2021    |    By Michael Schwager

Performance for Week Ending 12.3.2021:

The Dow Jones Industrial Average (Dow) finished off 0.91%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 2.15%, the Standard & Poor’s 500 Index (S&P 500) slumped 1.22% and the Nasdaq Composite Index (NASDAQ) closed down 2.62%. Sector breadth was negative with 9 of the 11 S&P sector groups closing lower. The Communication Services sector (-2.76%) was the biggest loser followed by Consumer Discretionary (-2.36%) and Financials (-1.98%).

Index* Closing Price 12/3/2021 Percentage Change for Week Ending 12/3/2021 Year-to-Date Percentage Change Through 12/3/2021
Dow 34580.08 -0.91% +12.98%
Wilshire 5000 46360.95 -2.15% +17.50%
S&P 500 4538.43 -1.22% +20.83%
NASDAQ 15085.47 -2.62% +17.05%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 11/29/21 – 12/3/21

The major market indices finished the week lower with the S&P and Nasdaq declining for a second straight week while the Dow and Wilshire closed lower for the fourth consecutive week. Driving the losses was uncertainty surrounding the new Omicron variant, a hawkish pivot by the Federal Reserve and a mixed read on the jobs market.

Omicron Variant: Fears of pandemic related shutdowns have resurfaced after the World Health Organization (WHO) reported that the newly named variant Omicron might be resistant to current vaccine structures and was named a 'variant of concern.' Governments around the world have started to close borders and issuing new travel and business restrictions to tame its spread. Early reports that symptoms could be milder than first anticipated were well received, however the WHO cautioned that it could take "several weeks" to assess the severity of the new variant. In a televised address, President Biden said Omicron is a cause for concern but not panic, and the fight against the variant won't involve "shutdowns or lockdowns." He also said that "we'll fight this variant with scientific and knowledgeable actions and speed, not chaos and confusion," and that vaccines likely offer some protection against the COVID strain. In a separate address Biden offered a detailed strategy outlining how we're going to fight COVID this winter – “not with shutdowns or lockdowns, but with more widespread vaccinations, boosters, testing and more."

Hawkish Pivot: Speaking on Capitol Hill last week, Fed Chairman Powell said central bank officials should weigh removing pandemic support at a faster pace. Powell also said the word “transitory,” used to describe stubbornly high inflation, should be retired and the new Covid-19 strain remains a risk. His comments, where both Democrats and Republicans expressed concerns about high prices, were taken as a hawkish pivot by financial markets that could lead to sooner-than-expected increases in interest rates next year. “It is appropriate, I think, for us to discuss at our next meeting, which is in a couple of weeks, whether it will be appropriate to wrap up our purchases a few months earlier,” said Powell, adding that “in those two weeks we are going to get more data and learn more about the new variant.” The next gathering of the policy-setting Federal Open Market Committee is Dec. 14-15. On the pandemic front, Powell said that the recent rise in Covid-19 cases and the emergence of the omicron variant pose “downside risks to employment and economic activity and increased uncertainty for inflation.” Several other Fed policymakers echoed Powell’s thoughts about the economic impact of the latest COVID-19 variant and flagged rising inflation concerns, suggesting a growing consensus for an earlier end to bond buys and, perhaps, earlier interest rate hikes next year. Speaking at a conference, Atlanta Fed President Raphael Bostic said it would be appropriate to end the central bank's bond-buying program by the end of March to allow the Fed to raise rates to deal with inflation.

Beige Book: According to the Fed’s “Beige Book” report, the U.S. economy grew at a “modest to moderate” pace during the Fall months, with supply-chain issues and labor shortages holding back growth despite strong demand. The report, which is based on surveys of business contacts by the Fed's 12 regional banks and will be the playbook for discussion when central bank officials next meet at the December Federal Open Market Committee (FOMC) meeting. The report highlighted that consumer spending increased modestly during the period, although low inventories held back sales of some items, notably light vehicles. Leisure and hospitality activity picked up in most Districts as the spread of the Delta variant ebbed in many areas. Construction activity generally increased but was held back by a lack of materials and labor. Manufacturing growth was solid across Districts, though materials and labor shortages limited expansion. High freight volumes continued to strain distribution systems. Energy activity was generally higher, growth in professional and business services varied widely, and demand for education and health services was largely unchanged. Loan demand increased in almost all Districts, though some reported declines in residential mortgages. Agriculture saw improved financial conditions overall and rising land values. The outlook for overall activity remained positive in most Districts, but some noted uncertainty about when supply chain and labor supply challenges would ease.

Jobs Report – Mixed Bag: On Friday, the Labor Department reported that nonfarm payrolls rose by 21oK during November, well below the 550K gain forecast by economists. On a positive note the unemployment rates—which is calculated using a different survey—fell to 4.2% from 4.6% in October. Average hourly earnings rose by 4.8% from a year ago and average hours worked advance slightly. While the headline nonfarm payrolls number was disappointing the overall report was mostly solid and still suggests that the Fed will push ahead with its plans to accelerate the pace of its QE taper at the FOMC meeting later this month, unless the scientific news on the Omicron variant over the next couple weeks is worse than expected.

Bullish Narrative Intact: As we look forward, our positive view on the equity market remains intact. While volatility is likely to remain elevated and the pace of gains will probably slow in the coming quarters, we feel the macro environment will remain supportive and should continue to provide a sturdy backbone for additional upside in the New Year. The US economy remains in good health and growth in the quarters ahead is expected to remain elevated. The US consumer is in good shape and savings rates remain above pre-pandemic levels, suggesting that as consumers become more comfortable with the economic recovery, pent up demand will be unleashed. Earnings expectations also suggest solid forward growth. Based on consensus expectations from Bloomberg, earnings are forecast to grow by almost 48 percent this year followed by about 8 percent growth in 2022 and just under 10% in 2023. While seasonality could act as a tailwind in the months ahead, a period of consolidation cannot be ruled out. However, if we were to see a drawdown in prices, we would view it as an opportunity to increase equity exposure.

The Week Ahead: News surrounding the Omicron variant from the scientific community will be the focal point in the days ahead. Investors are awaiting better data on transmissibility, morbidity, and efficacy of current vaccines. The key for investors in determining the ultimate economic impact of the variant and whether new lockdowns and/or restrictions will be needed is how deadly it proves versus prior iterations, and whether new vaccines are needed to protect against cases turning deadly. On the data front, consumer inflation will be front and center with the release of the consumer price index report on Friday. Other reports of interest include October job openings, initial jobless claims, and the University of Michigan sentiment data for December. The Fed speaking calendar will be nonexistent as Fed officials will be in their traditional blackout period of the following week’s FOMC meeting.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.




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