Over the last several days, the market experienced two events that resulted in re-pricing risk assets. The first was the omicron scare, which caused market participants to price in more restrictions, labor shortages, and bottlenecks resulting in slower global growth. The second was Federal Reserve Chair Powell testifying before the Senate, stating it was time to bury the term “transitory” when discussing inflation and suggesting further explanation was necessary when policymakers talk about inflation.1, 2 Investors anticipating the acceleration of the Fed’s asset purchasing taper and interest rate policy reacted accordingly, which increased volatility. Mixed economic data in the week provided little support.
North American equity markets ended the week in negative territory with the TSX losing 2.47%, the Dow losing 0.91%, the S&P500 declining 1.23%, the Nasdaq dropping 2.62%, the Mid-Cap S&P 400 falling 2.78%, and the Russell 2000 cascading 3.86%. European equity markets fared better and ended the week with concerns focused on the omicron Covid variant and inflationary pressures. The pan-European STOXX Europe 600 finished down 0.28%, the German Xetra Dax Index lost 0.57%, the French CAC 40 Index rose 0.38%, the Italian FTSE MIB Index gained 0.33%, and the UK FTSE 100 Index jumped 1.11%.
Last Tuesday, the Chicago Purchasing Manager Index (PMI), produced by the Institute for Supply Management (ISM) – Chicago, fell to 61.8% in November from 68.4% in October, the lowest reading since February. The Wall Street Journal’s poll of economists forecasted a 69%.3 On Wednesday, the ISM reported the national economic activity for the manufacturing sector at 61.1% compared to October’s reading of 60.8. This is the 18th consecutive month the reading has been above 50%, which signifies growth. The New Orders Index gained 1.7% in November to finish at 61.5%. The Production Index also rose 2.2% compared to October.4 The ISM reported a new high for economic activity in the services sector in November with a reading of 69.1%, which is 2.4 % higher than the previous high recorded in October. Two of the four subindexes, the Business Activity Index and the New Orders Index, both reaching new highs, contributed to the new high in the Sectors Index.5 In November, consumer confidence fell to the lowest level in 9 months to a reading of 109.5 from the October reading of 111.6. Some of the sub-indices of the report were down, with only short-term growth prospects slightly higher. The main reasons for the decline in the overall reading were rising costs, with worries over the Covid variant mentioned to a lesser extent. The Conference Board expects economic expansion to continue into 2022 despite inflationary and Covid headwinds, although this survey was conducted before the latest omicron variant became known.6
On Thursday, the Labor Department reported the initial claims increased by 28,000 to 222,000 from the previous week. The big drop last week in the initial claims and the increase this week may be attributed in part to the seasonal adjustments around the holidays. For the week ending November 31, all continuing claim programs increased by 21,564 to 2,306,353.7 On Friday, the Commerce Department reported October manufacturing goods rose 1%, while a Wall Street Journal survey of economists expected a 0.4% rise. New orders have been up 17 of the last 18 months. Many of the components showed improvement as the economy slowly moved forward.8
The week’s big story came on Friday with the release of the nonfarm payrolls coming in at a disappointing 210,000 jobs, the poorest performance this year. Wall Street was expecting job growth of more than 500,000 as businesses stepped up hiring in the month ahead of the holiday season. The participation rate rose slightly to 61.8%, the highest level since the beginning of the pandemic. In a positive sign, the household survey showed 594,000 re-entered the workforce, and 1.14 million people found jobs in November, accounting for the drop in the jobless rate to 4.2% from 4.6%.9
Economic headwinds are many as we wind down the year and head into the new year. The new Covid variant, more restrictions, implementation of employer vaccine mandates, agendas of policymakers in Washington, and the US Fed policy adjustments, to mention a few, will undoubtedly cause investors to recalibrate economic growth and generate more market volatility well into the first half of 2022.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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