VIDEO: Pandemic’s Resurgence Roils Markets
Welcome to my video presentation for Monday, November 29. The article below is a condensed transcript of my remarks.
Once again, a microscopic pathogen is bringing the world to its knees. Like the shape-shifting monster in a horror movie, COVID-19 has mutated into yet another fast-moving variant, defying vaccinations and causing a surge in infections, hospitalizations and deaths in Africa, Europe and Asia.
Dubbed Omicron, the variant already is prompting travel and business lockdowns overseas. The fear on Wall Street is that it’s only a matter of time the same dynamic afflicts America, just as the winter flu season gets underway.
Stocks nosedived last Friday, with the Dow Jones Industrial Average, the S&P 500, and the tech-heavy NASDAQ each declining more than 2%. The Dow fell more than 900 points, for its worst day of the year. The small-cap Russell 2000 plunged more than 3%. International stocks also tumbled, as did oil prices. The CBOE Volatility Index (VIX), the so-called fear index, soared more than 54%.
Friday’s steep losses capped a losing week (see table).
Thin trading volume during the holiday-shortened week likely worsened the declines. Just as the global economy was healing and the COVID crisis seemed to be waning, the pandemic sucker punched the world.
But it’s my job to provide you with context. Yes, last week was dismal. But hypothetically, if the S&P 500 were to finish at its current level, it would be the fifth-best yearly gain in the last 20 years.
Historically, the stock market has performed well in the weeks after Thanksgiving. A “Santa Claus rally” this season driven by strong holiday retail sales is not out of the cards (see chart).
Since 1950, the stock market on 19 occasions has gone into Thanksgiving with a year-to-date gain of 20%, including this year. In the following year, the average gain exceeded 18%.
A tailwind is consumer spending. The National Retail Federation projects an 8.5%-10.5% increase in holiday sales this year versus 2020. That would represent the highest holiday spending on record. Preliminary numbers show that “Black Friday” retail sales likely posted a new record high.
Fears that the variant will undermine economic growth weighed on oil markets last week, with per-barrel prices for U.S. benchmark West Texas Intermediate and international benchmark Brent North Sea crude swooning. Oil’s fall should help ease inflationary pressures, at least temporarily.
Significant economic reports scheduled for release in the week ahead include consumer confidence (Tuesday); ADP employment report, manufacturing PMI, consumer spending, and Federal Reserve Beige book (Wednesday); initial jobless claims (Thursday); and the national unemployment rate (Friday).
Bullish factors still in place…
Despite the emergence of Omicron, reasons for optimism remain. Indeed, in pre-market futures contracts Monday, U.S. stocks were trading sharply higher. Headline-driven volatility is likely to linger in coming weeks, but it seems that investors are determined to move beyond the Omicron-induced rout.
Pharmaceutical companies already are working on a new vaccine to tackle the variant and it’s entirely likely that the latest outbreak could quickly fade, just as Delta ultimately faded.
Corporate earnings are strong, and President Biden just signed a sweeping infrastructure package that provides multi-year fiscal stimulus. Consumers are sitting on a large hoard of household savings, and renewed COVID fears should prompt the Fed to lean toward dovishness.
Arguably, the head of the Federal Reserve is more important to Wall Street than the occupant of the White House. In Fed Chair Jerome Powell, investors have a steadfast friend.
Biden has nominated Powell (a Republican) to another four-year term as head of the central bank. The move disappointed progressives in Congress who want the Fed to take a stricter regulatory approach to banking, but cheered investors who seek policies that are friendly to Wall Street.
The Fed is tapering its asset purchases but regardless, Powell has vowed to do whatever it takes to nurture the economy and shore up the markets. As long as tightening of the federal funds rate remains far off, the bull run should continue, albeit with the inevitable setbacks along the way.
As I’ve just explained, the markets last week shifted to “risk-off” mode. If you’re looking for market-beating gains with mitigated risk, consider the trading strategies of my colleague Jim Fink.
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John Persinos is the editorial director of Investing Daily. Subscribe to his video channel.