This week, CIO Tom Weary, CFA®️, discusses the new Omicron variant of the coronavirus and its effect on the economy. He also covers inflation and manufacturing news before ending with the latest figures from the November Jobs Report.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update. It’s been a couple of weeks since our last update, and during that time the headlines have rocked stocks and bonds with news of a new, more highly transmissible coronavirus variant dubbed Omicron.  We had more data on the economy including Friday’s report on the jobs market, but let’s start off by looking at the pandemic since it continues to drive the investment narrative. 

After a quiet day on Thanksgiving, news about the Omicron variant seemed to appear out of nowhere on Friday, a day of very light trading, amplifying any move. The stock market closes early the day after Thanksgiving, at 1 o’clock, and trading desks are very lightly staffed.  As you can see in this first chart, the S&P 500 index dropped over 2 1/4% on Black Friday. You can also see from the chart, that it was the fifth drop of over 2% just this year, so such moves really aren’t that rare.  Volatility really picked up as every sell off seem to be followed by investors jumping in to scoop up bargains. One day this week saw a 1000 point intra-day swing in the Dow Jones Industrial Average. As you can see in the second chart, the VIX, or volatility index, also known as Wall Street’s fear index, spiked up dramatically on the news of Omicron.  The problem is that coronavirus cases were already on the rise here in the US before news of the new Omicron variant, as we can see in this next chart. And this rise in cases was before the Thanksgiving holiday, when millions of Americans traveled to gather with family members. We are likely to see a spike in cases due to people gathering for Thanksgiving and now due to the Omicron variant.  And the bond market did not escape unscathed. With Fed Chairman Jay Powell saying that the Omicron variant could both slow economic growth while putting pressure on inflation, the Treasury bond yield curve flattened, as we can see in this last chart.  Interest rates on bonds from one to 10 years rose, while rates on 20 and 30 year bonds actually declined. Yield curve flattening is usually considered a sign of slowing economic growth on the horizon. 

The government published the core personal consumption expenditures figure for October, which as we see in this first chart came in right as expected at 4.1%. This is roughly double the Fed’s long term target of 2%, which is pressuring the Fed to accelerate the tapering of quantitative easing. The prospect of a faster tapering is another reason for upward pressure on medium term interest rates. Higher inflation has inflated retail sales somewhat, but as we can see in this next chart on inflation adjusted personal consumption, spending by consumers has returned rather quickly to its long term trendline. Consumption is 70% of gross domestic product, and American consumers are amazingly resilient. They have also piled up $1.6 trillion in excess savings during the pandemic, which at some point will be spent or invested.  

Turning to the manufacturing side of the economy, things are still humming right along. The institute of supply management reported the November manufacturing purchasing managers index to be 61.1, as we see in this first chart, which was close to expectations and solidly in expansion mode. This strength in manufacturing is encouraging record amounts of investment by corporations.  This next chart, showing capital goods orders nondefense ex aircraft, which is considered the best measure of private investment by corporations, has skyrocketed and is hitting all time highs. This capital investment should boost productivity in the future and help contain inflationary forces. 

A strong jobs market is leading workers to feel very confident about their prospects. This first chart from the Conference Board shows the labor differential, or the number of those saying that jobs are plentiful minus those who say jobs are hard to get. It appears to have returned to the all time highs of the.com bubble. And the data seem to support that confidence. On Wednesday payroll processing firm Automatic Data Processing reported an increase in private payrolls of 534,000 for November, the third month in a row above the half million mark.  And on Friday the Labor Department reported a disappointing increase in nonfarm payrolls of only 210,000 and an unemployment rate of 4.2% from a separate survey. A strong jobs market bodes well for consumption and future economic growth. 

So, what does it all mean? Yet another highly transmissible variant of the coronavirus has burst onto the scene. It is unclear what the impact will be, but clearly pandemic news still drives the investment narrative for now. Underlying economic growth, on both the consumption and production sides of the ledger, appears to be growing nicely. Undoubtedly, economic growth will slow from the accelerated pace we have been seeing due to both monetary and fiscal policy not being as prominent going forward. We will continue to monitor developments on your behalf. So please, sit back, relax, have a great weekend, and join us again next week for the Weekly Market Update. 

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