The boy who cried 'variant' The boy who cried 'variant' http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\biotech-lab-small.jpg December 10 2021 December 10 2021

The boy who cried 'variant'

Omicron is a nonevent for the markets.

Published December 10 2021
My Content

I spent Wednesday in Birmingham, after a late-night flight where my 30-something, GQ-dressed neighbor in First Class wiped everything down, wore two masks, and refused snacks or drinks. He was lovely. And my fit, 30-something Uber driver wouldn’t let me remove my mask, after having to wear it for seven hours, because someone coughed the day before. “Plus, there’s a flu going around.” She was lovely. Airline masking requirements have been extended through mid-March, and in New York, Mayor Bill de Blasio has ordered all private-sector employees in the city to be vaccinated by month’s end. Lovely. Polls show a public frustrated with mandates—unions, office workers, even fellow Dems blasted de Blasio, while in the U.S. Senate, two moderate Dems joined Republicans to vote down President Biden’s vaccine mandate for businesses. While they are very much aware of the latest variant—Google searches about omicron have been gone parabolic—Americans seem to be moving past it. More than 72% of adults and 86% of those over 65 are vaccinated, and studies suggest the highly transmissible variant is mild. One of its mutations derives from the common cold. Mobility data thus far remains strong (at least domestically—international flights and other restrictions are disrupting some overseas markets). Cornerstone Macro’s proprietary tally of holiday foot traffic back to all-time highs, and Evercore ISI says while comfort levels with some activities have slipped, it’s modest relative to past virus waves.

The timing of omicron’s arrival has been met with suspicion. One Bloomberg columnist called it “a get-out-of-jail-free card’’ for politicians and policymakers as they “play for more time by blaming acts of God.” As if on cue, Fed Chair Powell said the recent rise in Covid cases and the emergence of omicron “pose downside risks to employment and economic activity and increased uncertainty for inflation.’’ Whether it’s enough to slow an anticipated acceleration of tapering should become clear when the Fed meets next week. Elsewhere, central banks in Australia, Canada and India held off this week on rate increases, citing omicron. It’s expected the Bank of England and the European Central Bank will react similarly next week. (Central banks in emerging markets, where inflation and currency always are top of mind, have gone the opposite way, with 72 rate hikes so far this year.) TIS Group thinks a new round of restrictions and stimulus in developed markets would only worsen supply chain disruptions and labor shortages. And it clearly would run counter to what markets think about omicron, as the arrival of the super-transmissible variant and Covid winter season is shaping up as a nonevent. A Deutsche Bank flash poll garnering nearly 1,600 responses from market participants found only 10% expect omicron to be a significant concern (it was 8% among U.S. respondents). And this was taken in late November before studies showed the variant to be far from deadly. Fundstrat’s favorite headline regarding the variant: “Denmark finds omicron in sewage and gives up trying to contain it.’’ Lovely … actually, Ew!

Inflation (more below), and the Fed’s reaction to it, very much remain key drivers for markets. They’re pricing in at least two hikes next year, the only question being when they come. Faster tapering is expected to clear the way for the first hike as early as spring. History shows initial Fed hikes are rarely detrimental for equities. Data from 1983 on show the S&P 500 rising 6.6% on average in the subsequent six months. Wolfe Research is calling 2022 “The year of the yield curve,” which has flattened of late as short rates have spiked while long rates have slipped (or at least remained range-bound at relatively low levels). It expects episodes of sharp flattening and steepening as Fed policy and the economy clash. But with real rates still deeply negative, it would be premature to get defensive until at least part of the yield curve inverts. Midterm election years tend to be the most volatile in the 4-year presidential cycle, with an average 19% correction, according to data going back to 1962. The good news is these sell-offs tend to be great buying opportunities, with stocks up one year from the low every time by an average of almost 32%. In fact, Strategas Research says the S&P has not declined in the 12 months following a midterm election since 1946. Not bad odds! Lovely. Unless there’s another variant ….

Positives

  • The labor market is tight but not this tight For the second time in three weeks, weekly jobless claims fell to their lowest levels since 1969, but new seasonal factor assumptions clearly played a role. A more realistic read is the non-adjusted number, which jumped, and continuing claims, which also unexpectedly rose. Still, the 4-week average that shakes out volatility continues to run near pre-pandemic levels. Meanwhile, October’s JOLTS data showed another surge in openings, putting the difference between openings and hires at a record high.
  • “Less bad” consumer sentiment The University of Michigan’s initial take of December sentiment rose more than expected off November’s 10-year low, as both current conditions and expectations improved while inflation expectations held steady at 4.9% for next year and 3% for the next five years. Notably, all the improvement was among households with incomes in the lowest third of the income distribution channel, driven by rising income expectations. The middle and top third declined.
  • Still on Easy Street Lost amid accelerated tapering talk is the fact that the Fed is still ultra-accommodative, with a balance sheet on track to expand at an additional $1 trillion+ annual rate over the next four months, before maxing out at around $9 trillion. It tends to take a year for max stimulus to have its full economic impact. There is a lot of liquidity, too. U.S. commercial bank deposits are at a record high, up more than $4 trillion since January 2020. While off their recent record high, flow of funds data show U.S. non-financial corporation’s cash as a percentage of assets remains elevated.

Negatives

  • A wage-price spiral would be bad Both headline and core CPI rose slightly more than expected in November, pushing respective year-over-year (y/y) rates to 6.8% (the fastest since 1982) and 4.9% (the fastest since 1991). Led by gasoline, energy and food prices drove the increase, but gas has fallen back somewhat since. Car prices and owners-equivalent rent also were factors, with ISI seeing evidence of leakage of “transient” components into more permanent measures, suggesting a wage-price spiral might be taking hold. Europe’s inflation numbers this week—eurozone PPI up 21.9% y/y—show it’s a global problem.
  • On the bright side, maybe I’ll finally get that pillow I ordered in May The volume of global container traffic just had its first y/y decline in 14 months, with three of the five heaviest traffic routes—Asia-to-U.S., intra-Europe and Europe-to-Asia, experiencing notable weakness, Bloomberg data show. German factory orders, a big source of global exports, fell 6.9%, their biggest drop since August.
  • Presumably, this is priced into stocks? The amount of pandemic-related fiscal stimulus expiring as the calendar turns to 2022 represents 8% of GDP, comparable only to the post-World War II drawdown in 1946 and 1947 and nearly triple the previous post-WWII drag of about 3.2% in 1969.

What else

Where are all the workers? Some are working from home, as suggested by the wide gap between surging residential employment and modest nonfarm jobs surveys of late. Cornerstone Macro thinks the work-from-home (WFH) explosion represents an unprecedented labor force participation tailwind. It estimates as many as 1.5 million prime-age workers may be added to the labor force by year-end 2022 as the pandemic eases and labor counts improve. It also sees the potential to add 1.4 million more as people with disabilities can WFH and exit disability rolls.   

Wage-price spiral fears overdone? While the Conference Board’s latest survey of firms shows salary increases of almost 4% budgeted for 2022, wage hikes and pressures have been concentrated in low-skill sectors. These often front-facing jobs are particularly exposed to increased labor supply and to increasing efforts by retailers, restaurants and other services to automate and digitize critical functions.

She’s such a diva A Deutsche Bank poll asking market participants for their favorite Christmas song saw Mariah Carey stage an impressive pandemic comeback, catapulting from third in 2019 to No. 1 with “All I want for Christmas is you.’’ “Last Christmas” (Wham) and “Fairytale of New York” (The Pogues and Kirsty MacColl) both slipped a place. Frank Sinatra’s “Have Yourself a Merry Little Christmas” was fourth globally but topped the charts in the U.S.

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Tags Equity . Markets/Economy . Coronavirus .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Producer Price Index (PPI): A measure of inflation at the wholesale level.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The Job Openings and Labor Turnover Survey (JOLTS) is conducted monthly by the U.S. Bureau of Labor Statistics.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

Yield Curve: Graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities.

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