Market Strategy 11/29/2021
Not Quite Déjà Vu
Black Friday’s downdraft reflected angst but not panic over the “omicron” variant
Key Takeaways
- This week will garner investors' attention chock-full of key economic data including the nonfarm payrolls report at the end of the week and any news updates on the “omicron” variant of the COVID-19 virus.
- Friday’s stock market decline appeared measured relative to the positive performances by major benchmarks this year.
- With only 13 companies left to report in Q3 earnings season, S&P 500 earnings are up 40.8% on back of 17.5% revenue growth. Eight of the 11 sectors have reported double-digit earnings growth this season.
- Economic data released last week showed a 0.5% decline in durable goods orders but a solid gain of 0.6% in nondefense capital goods.
Just in case investors were overly focused on supply chain disruptions, labor shortages and government spending and were becoming complacent about COVID19 risks, the omicron variant reared its ugly head last Friday with news that crossed the proverbial transom and rattled a broad array of markets around the world in a stateside Thanksgiving holiday-abridged week.
Stocks and commodities fell broadly across the globe as bond prices rose and yields fell last Friday. Market bears came out of hiding we’d presume relieved by the direction the market took versus the direction it’s taken for most of this year.
From our perch on the market radar screen Friday’s action appeared driven mainly by algorithms and reactions from investors whose profiles likely included: shortterm traders, commodities traders, currency traders, leveraged players and others with aggressive positions in meme stocks and other hot issues that were among the areas that “felt the most heat” on the declines of the day.
We consider that on Friday the major averages representative of the stateside equity markets: the Dow Jones Industrial Average, the S&P 500, the S&P 400 (midcaps), the S&P 600 (small caps), the Russell 2000 small caps and the NASDAQ Composite (some 40%-plus weighted in tech or technology related names) respectively declined 2.53%, 2.27%, 3.16%, 3.72%, 3.67% and 2.23%.
By comparison WTI (West Texas Intermediate Oil), Gold, Copper, and the US dollar index respectively declined 12.8%, 5.7%, 3.94% and 0.43% on Friday.
The dollar’s decline on Friday against an array of major global currencies in the Bloomberg DXY dollar index (made up of major developed and a few emerging markets) lessened losses experienced by foreign stocks respectively reflected in aggregate in three major international indices including MSCI EAFE (developed international equity markets ex- US and Canada), MSCI Emerging markets and MSCI Frontier markets. These three indices respectively declined on Friday 1.69%, 2.4% and 0.25% when “translated” (converted) into dollars.
In our view Friday’s global market activity taken in context of the performance of most of the aforementioned asset classes year-to-date broadly reflects an acknowledgement of the unknown level of risk that the latest variant represents to economic re-openings but not an over-reaction.
Twenty plus months into the pandemic crisis and with investors’ having begun (before last Friday) to anticipate that the pandemic would likely turn endemic sooner than later, news on COVID-19 and its latest variant “omicron” will likely stay on the “front burner” for investors in the weeks and months ahead.
Some Good News from Washington, D.C.
President Biden’s announcement of his re-nomination of Jerome Powell as Fed Chair for the next four years was well received by the markets last week. Continuity of leadership has in our experience proven in the past to be of significant importance to the markets particularly when it comes to the individual at the helm of the Federal Reserve.
The nomination of Lael Brainard (who has worked closely with Fed Chair Powell in his first term) to ViceChair should add positively to the relationship the markets currently have with the Fed in terms of policy in this highly transitional period.
Q3 Earnings Season in the Home Stretch
With just 13 companies left to report results in the Q3 earnings season S&P 500 earnings are up 40.8% on back of 17.5% revenue growth. Of the 11 sectors in the S&P 500 eight have reported double digit earnings growth this season. Five of these have seen expansions in excess of 30% in the period including: materials, industrials, communications services, information technology and financials with earnings up respectively 91.3%, 69.5%, 40.2%, 39.5% and 35.7%.
Notwithstanding the comparison advantages in Q3 over the same period in 2020, keeping things in context will likely remain key for investors moving into earnings season in the year ahead when comparisons might not shine quite as brightly with the turn of the calendar.
This week: a Hefty Brace of Economic Data
This week brings: home prices, Chicago PMI, Conference Board consumer confidence, ADP employment change, construction spending, ISM manufacturing, the Fed’s Beige Book, Ward’s vehicle sales, jobless claims, nonfarm productivity, culminating on Friday with the nonfarm payroll change, the unemployment rate, average hourly earnings, the labor force participation rate and ISM services data
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