Sightline Weekly Market Update: Markets React to Covid Uncertainty
The holiday-shortened week finished with the steepest daily decline in two months, reacting to a new, more virulent Covid strain from South Africa. Friday’s low trading volume provided little support for the equity market sell-off. Value stocks fared better than growth with continued weakness in technology stocks, which struggled before the Thanksgiving holiday as rising rates made future corporate profits less valuable in today’s market. President Biden’s announcement that the US would release oil from the strategic oil reserves to help push gasoline prices lower, easing inflationary pressures, was initially met with a rally in oil stocks. On Friday, oil stocks responded to the news of the new Covid variant and its potential impact on crude oil demand, sending oil stocks in a tailspin and losing 10% on the day.
The TSX finished the week declining 1.72%. The US S&P 500 lost 2.20%, the Nasdaq dropped 3.52%, the S&P 400 fell 3.18%, and the Russell 2000 plummeted 4.15%. The European bourses did not fare any better, declining on worries of increasing restrictions and the corresponding impact on the economic recovery.
Last Monday, President Biden announced plans to renominate Jerome Powell as the Federal Reserve Chairman over the less dovish Lael Brainard. The reappointment of Chairman Powell was viewed as a positive along with the release of the FOMC meeting minutes on Wednesday, indicating some policymakers supported an accelerating taper of asset purchases. Yields pushed marginally high on the short end of the curve only to fall on Friday as investors moved to the safety of bonds over fears of renewed lockdowns and restrictions slowing economic recovery.
Last Tuesday, HIS Markit surveys for November reported a modest acceleration of improvement in economic growth across the world’s largest developed economies. The flash survey of US manufacturing increased to 59.1 in November from 58.4 in October. Although the demand supports expansion, bottlenecks in the supply chain and labor shortages continue to plague businesses’ ability to meet customer demand.1 On Wednesday, the Commerce Department reported the US economy grew at a 2.1% annual pace, revising the earlier reported 2.0%. Economists expect US GDP to grow at 4.8% in the fourth quarter, but that was before the latest Covid variant.2 Also on Wednesday, the Commerce Department reported consumer spending rose 1.3% in October, with the bulk of the spending on new cars and travel services. Price inflation accounted for 0.6% of the latest move. 3 The Wall Street Journal survey of economists polled expected a 1% consumer spending increase.4 Escalating inflation dampened consumer confidence in the latest University of Michigan’s gauge to 67.4 compared to the October reading of 71.7. The decline in optimism stems from the rapid rise in inflation impacting living standards and no clear Federal policy response rectifying the impact of inflation on households. Further, consumers expect economic growth to slow as consumers adjust spending patterns due to inflationary pressures. Over the next five years, consumers still expect inflation to return to lower levels; however, the most recent survey indicated the lower level increased from 2.5% to 3.0%. If this trend persists, it may become difficult to control inflation, especially if it continues to rise unimpeded into late 2022.5 The initial unemployment claims at 199,000 fell 71,000 from the previous week to the lowest level since November 15, 1969. Continuing claims from all programs were 2,432,281, a decrease of 752,390 from the last week compared to the same week the previous year at 21,111,266.6
As we move through the last quarter, optimism for economic recovery will have several hurdles to overcome, undoubtedly influencing investor sentiment, as we experienced last Friday. Markets are likely to become choppier as the length of the recovery matures.
1 https://ihsmarkit.com/research-analysis/flash-pmis-signal-stronger-developed-world-growth-but-rising-covid19-cases-cloud-outlook-Nov21.html; https://www.marketwatch.com/story/u-s-economy-grew-rapidly-in-november-markit-surveys-show-but-shortages-persist-11637680199?mod=economic-report
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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