The Omicron Threat | November 26, 2021 | FFS

Markets sold consistently across the week. Is there more red to expect in coming weeks?

Monday S&P 500 1.20% | NASDAQ 1.79%

Happy Tax Day! Retail sales expanded more than expected in March. Three major companies reported earnings, all three met expectations, all of which were financials. This was not surprising as financials usually head up earnings season. They also give us a good indication of how earnings season should go. Retail sales, however, took center stage as a strong consumer reduces the need for Federal Reserve Board (FRB) rate cuts. This caused an outsized move downward as investors anticipate less stimulus for 2024.

Tuesday S&P 500 0.21% | NASDAQ 0.12%

Housing data for March came in weaker than market expectation. Ten major companies reported earnings, with two missing expectations. Although mild, the losses continued. FRB Chair Powell indicated that inflation’s recent strength does not give the board confidence to start easing policy.

Wednesday S&P 500 0.58% | NASDAQ 1.15%

11 major companies reported earnings on the day, with three missing expectations. Focus was squarely on earnings as there was little economic data on the day. Tech stocks took a hit as AI chip orders for a specific company did not meet expectations. As would be expected this hit the tech heavy NASDAQ harder than the S&P 500.

Thursday S&P 500 0.22% | NASDAQ 0.52%

Initial unemployment claims remain benign. Existing home sales also slowed in March. 11 major companies reported earnings on the day, with one missing expectations. Markets were down for the day, but in a less dramatic fashion. Robust employment data typically is not favorable information when hoping for an FRB rate cut (as investors are).

Friday S&P 500 0.88% | NASDAQ 2.05%

Six major companies reported earnings on the day, with one missing expectations. NASDAQ led the way lower as Tech and communications got hit hardest. The best performers on the day were defensives, like utilities, healthcare, staples, and also financials.

Conclusion S&P 500 3.05% | NASDAQ 5.52%

The week was bloody. There was not a single up day for the S&P 500 or the NASDAQ Composite. The moves were not founded in fundamental data, as earnings did well. Some forward guidance shows warning of slowing revenues throughout the year, but that is normal for the last two years. Economic data, which signals the economy is doing well, has actually pushed stocks lower. The stronger the economy, the less likely the FRB is to act in reducing rates. The sell-off has extended to approximately 6%. It may take a breather in the coming days but expect that we are not done.

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Markets fell hard for the week. Omicron rose as a threat, but was that really the big news of the week?

Monday

Markets opened the week mildly lower. The S&P 500 fell 0.32% on the day. Federal Reserve Board Chair Powell was renominated for his seat. The lack of a reaction from equity markets is a result of the known behavior he represents. Bond markets actually reacted adversely as he represents a dovish stance. This means there are concerns that he may wait too long to take necessary actions.

Tuesday

The S&P gained back some of the losses from Monday as it advanced 0.16%. Manufacturing data rolled in better than expected; however, services data (the crux of our economy) softened.

Wednesday

On Thanksgiving eve, markets managed to rise as the S&P 500 closed above 4,700. The S&P 500 gained 0.22%. The major news was that initial jobless claims fell to 199K. This marks the first time that this statistic has fallen below pre-pandemic levels!

Thursday

Happy Turkey Day!

Friday

Omicron gripped markets around the world on Friday. As there is little certainty surrounding the new variant, the unknown drove trading. Recovery stocks suffered, while stay at home stocks caught a bid. With the Thanksgiving holiday causing light trade, volatility was exacerbated, and the S&P 500 shed 2.27%!

Conclusion

Most will see the actions of Friday as the big news, however, the renomination of Powell may prove more impactful. Little is known about Omicron to understand its full implications. The renomination of Powell provides certainty that we will likely continue on the path of tapering. That path maybe accelerated as result of persistent inflation. This also means a continued path towards rate hikes in early 2023. Those hikes may also be accelerated to fall 2022 as a result of persistent inflation. These changes represent adjustments to outlooks, rather than wholesale changes to investment strategies.