Americans using pocketbooks to fight back against Covid weariness.
Off to Phoenix this week for annual meetings with some of my favorite people, and the Mister tagged along. I saw my first NBA game in many years, as two of the top teams in the league, the Phoenix Suns vs. Golden State Warriors, faced off, and the tickets were hot! Masks were required to enter, but precious few were worn in the full arena (lots along the floor, though). Super-spreader event or not, it was a party!! Beyond sports, courts of law around the country are striking down mask mandates. Revenge of the Covid-weary populace. Consumers tired of being stuck at home are getting revenge, too. Holiday week air travel surged to near 2019 levels and Evercore ISI’s proprietary gauge of Thanksgiving sales soared to a record high. Yes, there’s omicron. Much is unknown about the variant. Reports suggest relatively mild symptoms. The WHO thinks vaccines will prevent severe cases. What we do know is with each Covid wave, the economic impact has lessened. The December 2020-January 2021 spike, for example, saw monthly payrolls shrink 76K on average; during summer’s delta surge, they rose 435K on average. Before my first talk in Phoenix, I asked an advisor how to pronounce the name of the new variant. “Omnicron,” he replied. No, I don’t think there’s an extra “n” in that word. Whatever … five meetings in a row, and the dominant conversation was about cryptocurrencies.
The knee-jerk reaction to Fed Chair Powell’s testimony before Congress was interesting. What he said really wasn’t all that different from what he’s said previously. He officially retired “transitory” to describe inflation (a month ago he was questioning the word’s utility) and said inflation may run a littler hotter a few months longer in 2022 than thought a month ago. So, faster tapering and earlier liftoff. Recalling how bond yields spiked in May 2013 when then-Chair Bernanke first suggested the Fed may “taper’’ its quantitative-easing bond purchases, Jefferies termed this week’s plunge in yields on Powell’s accelerated tapering signal “the anti-taper tantrum.” The market’s concern is the Fed’s long history of overreaction to inflation, but with a twist this time. In the past, policymakers were proactive, raising rates to prevent potential price pressures. This time, they’re being reactive. Inflation already is here and running hotter than they wanted to make up for years of sub-2% inflation. The worry is the same, that the Fed may raise rates too aggressively, sending the economy into recession. A worry for another day, as this week’s reports (more below) added to evidence that the economy is humming—the Atlanta Fed’s latest GDPNow forecast says Q4 growth currently is running at a 9.7% annualized pace. Now there’s an economy getting its pandemic revenge!
Volatility has spiked, the yield curve has flattened further and credit spreads have widened on the omicron news and the Powell pivot. Cyclical sectors have sold off, dropping the S&P 500 50-day moving average below support. There’s likely more pain ahead as yesterday’s rally was likely insufficient to confirm the low’s in. Broader-based gauges such as Value Line and Russell 2000 indexes are nearing levels that suggest stabilization, and breadth appears better than many investors think, with the average S&P stock up 21% year-to-date vs. 22% for the overall index. A fading of variant fears could shift attention back to the strong economy, helping cyclicals and small caps catch a bid. However, until there’s more clarity on omicron and the debt ceiling (again!), the next few days and weeks are likely to stay volatile. But December’s historically the strongest month—up 2.3% on average since 1936—with seasonality backloaded into the last 10 days. Just in time for Santa.
- There are no layoffs This morning’s big headline nonfarm jobs miss—up 210K, less than half consensus—masked a lot of positives: gains in manufacturing, construction, transportation and professional services (retail and virus-linked hospitality were the drag); a 4.2% jobless rate, with improvements in the Black and Hispanic unemployment; rising participation; and 1 million+ jump in the separate household survey of employment. Also, ADP payroll gains topped 500K a third straight month, jobless claims neared pre-pandemic averages and Evercore ISI’s layoffs tally fell to virtually zero.
- The economy is humming ISM and Markit manufacturing and services surveys surprised to the upside in November—the ISM services gauge hit an all-time high on record orders and business activity. Separately, October factory orders ex-transportation jumped 1.6% and pending home sales surged 7.5%, pushing the annual pace of sales to a high for the year.
- Peak bottleneck November’s elevated ISM manufacturing and services readings suggest supply bottlenecks and price pressures are easing, as supplier deliveries and price components leveled off. Satellite “pings” of container ships in the L.A.-Long Beach ports show the shipping traffic jam there peaked in mid-November, with total deadweight tonnage down 25% by last Sunday.
- Where are all the workers? While November’s bump in labor force participation was encouraging, it remains 1.5 points below its pre-pandemic level. Assuming many potential workers may be living off elevated savings and investments on the prolonged equity and cryptocurrency rallies, TIS Group wonders if a big sell-off may claw a big chunk of the roughly 4 million missing workers back into the labor force. Makes a lot of sense to me.
- Peak margins Markit’s surveys showed new orders growth slowed on shortages and customer pushback to higher prices. Even as their input costs hit new highs, many firms lowered selling prices to win/retain customers. The Fed’s Beige Book highlighted wage pressures, which represented the second highest reading on record at the Dallas Fed, just behind June’s all-time high. This hints at a squeeze on margins that have been buttressing earnings growth.
- Should we worry about a fiscal drag? Even if Build Back Better passes, fiscal stimulus next year is projected to plummet to about 2-3% of GDP vs. 11% this year, likely slowing consumer demand and ultimately the economy. Strategas Research wonders if that worry is overdone. It notes employment growth that has seen wages and salaries grow at roughly seven times the growth in transfer payments under Covid emergency relief programs.
Peak inflation A slowdown in home prices, which affect CPI with a 6-month lag, began in September and carried over into October, Case-Shiller, FHFA and home sales reports show. This suggests this influential component should being to normalize in spring, just as year-over-year CPI base effects begin moderating, too.
Count me in the majority Bank of America shares that 99% of people on the planet don’t know what the metaverse is and that Google searches for the term have risen sixfold since 2020.
Got your tree yet? If not, you better hurry. Tree sales were up 10% in ISI’s first survey of the season, but the American Christmas Tree Association warns of—what else?—shortages. This year’s trees are being squeezed by damage caused by the summer’s heat dome in the Pacific Northwest, sky-high transportation costs, and shipping and labor problems plaguing many industries.