This week, CIO Tom Weary, CFA®️, begins by covering the latest news on the pandemic as U.S. daily COVID-19 cases reach an all-time high. He also reports on December PMI numbers indicating a strong domestic economy, discusses the stock market’s shaky week, and shares the latest earnings from RFA Core Portfolio holding Constellation Brands.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update. Well, actually, as you can see I am here in my home office this week.  Yes, the Omicron surge of the pandemic has reached the doorstep of RFA with some of us working remotely while those in the office mask up and remain behind closed doors in their offices. Never fear though, as we all continue to work diligently on your behalf. So let’s start there, and get a quick update on the pandemic.

The Omicron variant has proven to be far more contagious than any of its predecessors. As you can see in this first chart, new daily cases of COVID-19 have skyrocketed due to Omicron, far surpassing the levels seen in any prior wave.  The surge in cases this fall due to the Delta variant pales in comparison. But the good news, if there is any, is that the effects of Omicron appear to be much more mild.  This may be due to the fact that more of the population is vaccinated, but it seems that the Omicron variant does not penetrate the lungs as deeply. As you can see in this next chart, while global new daily cases have skyrocketed during the Omicron surge, the number of daily deaths have actually declined. We seem to be getting better at battling this disease. And the optimistic view on Omicron’s high transmissibility is that this may be the surge that burns its way through the rest of the population, bringing the end of the pandemic that much closer.

The stock market began the new year a bit unsteady on its feet when the release of minutes from a recent Federal Reserve meeting showed that the Fed is very serious about battling inflation and may raise short term interest rates sooner and faster than market participants currently expect.  While Wall Street will miss the era of free money, recent data suggest that the economy is fairly strong and no longer needs such strong support from monetary policy. This week the Institute for Supply Management released their Purchasing Managers Index readings for December. On the Manufacturing side, the December reading came in at 58.7, slightly below expectations of 60, as we can see in this first chart. But remember that any reading above 50 indicates expansion, so there is clear strength in manufacturing. On the Services side, the December reading came in at 62, as we see in this second chart, again below expectations for 67, but still well into expansion mode. The big drop may represent a pullback by consumers due to the surge in COVID cases brought on by the Omicron variant.  Taken together, these readings for December portray a very strong domestic economy, one which no longer needs the crutch of zero interest rates.

Turning to the jobs market, the story again is one of strength. In the recent JOLTS survey, the number of U.S. job openings in November was 10.5 million, as we can see in this first chart, which was the fourth straight month above the 10 million mark. This is versus roughly 7 million unemployed people, so there are about 1 ½ job openings for every unemployed person. And in this second chart we can see the number of Americans quitting their jobs hitting an all-time high in November of four and a half million. Those quitting their jobs are mostly low wage earners in high-risk face-to-face service industries who are either finding better paying jobs or are switching to work from home opportunities presented by the pandemic.  On Wednesday, payroll processor ADP reported an increase in private payrolls in December of 807,000, which as we can see in this next chart is roughly double economists’ expectations. On Thursday, Initial Jobless Claims for last week came in at 207,000, a bit above expectations but roughly in the range of recent experience. On Friday, the Labor Department reported that the increase in Non-farm Payrolls for December was 199,000 versus expectations for 447,000 and an Unemployment Rate of 3.9 percent from a separate survey. The disappointing increase in payrolls seems at odds with both the ADP payroll figure, that is over four times as large, as well as the large drop in the unemployment rate. We may very well see a revision next month.  Overall, the data taken together paint a picture of a very strong domestic jobs market.

On Thursday, Constellation Brands, the distributor of Corona beer in North America and a holding in the Core Portfolio reported results which beat estimates on both the top and bottom lines. Earnings of $3.42 beat by 63 cents on revenue of $2.3 billion, which beat by $40 million. Constellation also announced a new deal with Coca Cola to bring its new mixed cocktails into the US market this year. The agreement allows Constellation Brands to manufacture, market and distribute Coca Cola’s Fresca Mixed, which is a new line of ready to drink cocktails using real spirits. Adult alternative beverages, including ready to drink cocktails represents nearly an $8 billion segment projected to grow at 15 to 17 percent on average over the next three years.  We also heard from diversified food giant ConAgra Brands, a holding in the Defensive Portfolio. ConAgra missed earnings estimates of 64 cents per share by four cents, although revenue was slightly above forecasts. ConAgra did raise its full year sales forecasts on higher prices and strong demand for its frozen foods.

So, what does it all mean? The stock market begins the year with a shaky first week as The Fed makes a hawkish turn and COVID-19 cases skyrocket due to holiday travel and gatherings with the highly transmissible Omicron variant widespread. And yet, The U.S. economy appears to have a strong footing, and remains in expansionary mode even if its growth rate is slowing from the supercharged level of the past two years thanks to highly stimulative monetary and fiscal policy.  We will continue to monitor the data to see what kind of impact Omicron ultimately has upon the economy. In the meantime, your companies continue to post solid results. Earnings season gets going next week, with JP Morgan Chase reporting results on Friday.  We will stay on top of the latest developments as they unfold. So please, sit back, relax, have a great weekend, and join us again next time for the next Weekly Market Update.

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