Market Update December 6, 2021

Photo by Jean-Louis Paulin on Unsplash

Economic data for the week included stronger manufacturing data and higher home prices, while consumer sentiment fell back a bit. The employment situation report came in far weaker than expected on a headline basis, although other data appeared more robust.

U.S. equity markets fell back last week upon the Federal Reserve’s evolving opinion of inflation and the uncertainty surrounding the new Covid omicron variant; foreign stocks, however, fared better. Bonds gained ground in keeping with investors moving away from risky assets. Commodities lost ground, with the prices of crude oil and natural gas continuing to fall on demand concerns.

U.S. stocks experienced a volatile week, ending downward and capping a -4% pareback from highs last month (these always feel deeper). Despite a decent start on Monday after the prior week’s negative reaction to the new Covid omicron variant news, Moderna’s CEO commented that omicron may elude the effectiveness of current vaccines. (This is despite little data being available so far about r-values; and, of course, vaccine makers do benefit from additional vaccines being manufactured and dosed.) Markets took even more seriously Fed Chair Jerome Powell’s comments to Congress alluding to a potentially faster pace of tapering, given that the ‘threat of persistently higher inflation has grown.’ (His comment about ‘retiring’ the term ‘transitory’ seemed to especially rattle markets, due to his persistent use of the word over the past year—it was perhaps seen as capitulating to the stubborn nature of current inflation pressures.) Later in the week, the back-and-forth market movement continued, as investors absorbed news of the first U.S. omicron cases, which have intensified over the weekend. Congress passed a bill to keep the government open, which removed one source of potential year-end volatility, while a poor employment situation report cast a negative pall by the end of the week.

By sector, defensive utilities provided the only positive performance, while results were most negative in communications and consumer discretionary (leisure/travel, although mostly Tesla), and financials. Real estate ended flattish on the week, with economic negativity offset by falling interest rates. Small caps suffered far worse than large caps domestically.

Foreign stock returns were interestingly more benign with mixed to little change across the board: gains in the U.K., Japan, and the emerging markets were offset by a decline in Europe. Lockdowns have intensified in several European countries, with mandatory vaccinations also on the docket in Germany, as well as travel restrictions in both Europe and Asia. In emerging markets, sharp declines in China, due to another property developer experiencing debt problems, and Turkey in USD terms, less due to Covid than unconventional monetary policy and an accompanying currency crisis. On the other hand, commodity nations, including Russia and South Africa, gained sharply.

U.S. bonds fared positively, as investors moved away from risk. Interestingly, investment-grade corporate and high yield bonds outperformed treasuries. The dollar was little changed, which resulted in similar gains in foreign bonds—especially USD-denominated emerging markets.

The U.S. treasury yield curve is simple, yet complicated, in that it compresses a large amount of information and assumptions about various possible rate paths. For example, with rising market concerns over faster Fed tapering off of purchases, 10-year and 30-year treasuries fell sharply in yield, while the 2-year has risen by an equivalent amount. This created a broad curve flattening effect. Rising inflation worries, but a slower Fed buying effort, might imply larger bond supply, lower prices, and higher yields at first glance. However, this was outweighed by worries over second derivative thinking of a Fed policy error (and more Covid), resulting in higher medium-term recession probabilities (resulting in a flight to quality).

Commodities continued their general decline, as concerns over demand are rooted in the potential impact of the omicron variant. The price of crude oil fell by almost -3% to just above $66/barrel, which brought the return over the last two weeks to over -15%. Some reports call for this latest downturn to be far overdone, though, with it being described as akin to airline oil usage grinding to a halt for several months. Natural gas prices plummeted -20% last week alone (gas is one of the most volatile commodity contracts), as forecasts of warmer-than-usual winter temperatures would indicate lower usage.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.