Omicron Uncertainty – After the discovery of the new Omicron variant caused a sharp drop, the market has recovered back to near highs as initial data seems to indicate that (1) the variant may be less severe than its predecessors and (2) that the current vaccine may still provide protection. This has quickly shifted investor mindsets back to a risk-on mentality as the economic recovery continues.
The Fed – Recent commentary from Fed Chair Jerome Powell signaled that the Fed would consider speeding up its withdrawal of bond purchases (a.k.a. tapering) as he admitted that inflation risks indeed have increased and may not be “transitory.” Even with good news that supply-chain woes are starting to recede, most manufacturing and retail executives say that they do not expect a return to normalcy until mid-next year.
Speaking of “not transitory”….. In his closing remarks, Fed Chair Powell relayed that it is a good time to retire the word “transitory” for describing the current inflationary environment. This hawkish tone came as somewhat of a surprise, but this pivot may eventually be digested as a market positive since it most likely reveals the Fed’s forecast of continued economic strength.
The Consumer – Solid retail sales data (1.7% increase in October vs. 0.8% prior month) suggests excess savings and rising wages have helped Americans sustain healthy consumption, despite mounting inflationary pressures and falling confidence levels as the below chart indicates. A strong consumer bodes well for economic activity as household expenditures account for roughly 70% of GDP.
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Jobs – The labor market lost momentum again last month as the Labor Department reported that nonfarm employment rose by only 210k (missing expectations of 573k) through the middle of the month, down from 546k in October. Despite the big shortfall in job creation, the unemployment rate fell by more than expected to 4.2% of the workforce from 4.6% in October. Also, the most recent weekly jobless claims report came in at 184,000, the lowest level in 52 years.
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Earnings Continue to Impress – Q3 earnings season is just about done, and it is another in a string of strong earnings seasons that has exceeded analysts’ estimates by many metrics. The tremendous outperformance is another sign that some doses of inflation are actually stimulative for corporate profits despite the challenges imposed in labor shortages and supply-chain bottlenecks.
SOURCES:
Sanctuary Asset Management CIO Corner December 2021
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