The emergence of the COVID-19 Omicron variant triggered a market selloff in the days following Thanksgiving and offered an unpleasant reminder that the pandemic is not over. The economy and financial markets remain somewhat reliant on the medical community and research developments. Additionally, Chairman Jerome Powell and the Federal Reserve did an about face on their stance on the pace of the recovery and inflationary pressures, communicating that a raise in interest rates would come sooner that previously expected. This also led to volatility in the markets recently.
While it appears that the threat of the Omicron Variant is waning, predicting its impact remains difficult at this point. There are logical reasons to expect limited economic impact, such as high vaccination rates, advances in treatments to reduce instances of severe disease, and various containment measures to limit spread (masks, distancing, etc.). Lockdowns are extremely unpopular, and given Chairman Powell’s comments around interest rates and bond tapering, we believe we will likely avoid that scenario.
The drag on the economy will likely be modest, however we simply won’t know for sure until we get more data over the next couple of weeks. Markets don’t like uncertainty, and we’ll have an extra helping for the next few weeks at least.
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There is a lot of good news out there!
Action take by the Federal Reserve and the unpredictable nature of the pandemic does not change the fact that the U.S. economy is showing some strong momentum. A solid 1.7% increase in retail sales in October and a good start to the holiday shopping season point to strong consumer spending in the fourth quarter. The National Retail Federation sees holiday sales potentially increasing by 10% this year compared with 2020. Meanwhile, new filings for jobless claims for the week ending November 19 fell to a 50-year low, an impressive number even considering distortions from seasonal adjustments.
Businesses are doing their part to support financial markets in a tough operating environment. Profits from S&P 500 Index companies rose nearly 40% year over year in the third quarter and are expected to rise another 20% in the fourth quarter (source: FactSet) despite persistent supply chain disruptions, shortages of labor and materials, and related cost pressures. Net profit margins for S&P 500 companies in the third quarter remained near record-high second quarter levels, a remarkable feat given the circumstances. Finally, manufacturing surveys point to solid demand while offering signs that supply chain disruptions, and possibly inflation pressures, may be at or near a peak.
The path back to normal has been bumpier than anticipated, but we’ll get there. Omicron probably won’t derail the economic recovery or cause a stock market correction, but at this point we just can’t know for sure. Be patient, and stay tuned.
As always, please call me if you would like to discuss your financial plan and any changes that might be on the horizon for you. Our office: 805-439-3800.