US Stocks had a rough ride for the second week in a row as investors grapple with a rapidly spreading new Covid variant and a Federal Reserve that is taking its foot off of the accelerator as inflation concerns mount. While media outlets are making much of the declines, the reality is, we are still near all-time highs.
It is easy to get caught up in the drama of recent headlines. These are emotional times. It is essential to take a step back and look at the big picture at such times. Despite recent declines in the S&P 500 (about 3.5%), the stock index is up over 22% this year. Since the beginning of 2020 (pre-pandemic), the S&P 500 is up over 52%. So, no, these are not trying times for investors; these are boom times!
Investors must keep their cool in times of turmoil. Investing should never be about emotion; rather, it should be about doing what is rational. No one knows what the next six months or even six days hold for investors. But what we do know is that losing your nerve and exiting the market at the wrong time can do permanent damage to a financial plan.
The best defense against these emotions is a portfolio that inspires confidence. If you are investing at a level of risk that is right for you and have an intelligently diversified portfolio, you can sit back and let the market do the rest of the work!
The November jobs number this week was not great, but the unemployment rate fell much faster than expected.
Headlines This Week
US Stocks had another tough week, dropping nearly 2% thanks to a more hawkish Fed and the uncertainty of the Omicron Covid-19 variant.
This week, Fed chair Powell was in front of Congress and revealed a more hawkish mentality.
- He noted that the risk of inflation has increased and surprised the market by stating that the term “transitory” is no longer appropriate when it comes to inflation.
- The pressures that are stoking inflation are expected to persist well into next year. The Chairman said they might need to accelerate the tapering of asset purchases to combat price increases. Stocks pulled back on that revelation.
Oh my, a New (not Nu) Variant
This week, the rapid spread of a new covid variant, Omicron, shook investor confidence. Investors do not like uncertainty, and the latest variant introduces more questions than answers.
- We know it is spreading fast, but we do not know how well vaccines will protect or the severity of symptoms.
- The concern is that it will have an impact on economic recovery and further exasperate supply chain issues which are putting upward pressure on inflation.
- For Greek alphabet aficionados, you may be wondering why Omicron was chosen and not the next available letters Nu and Xi. Nu was viewed as too confusing for obvious reasons, and Xi was seen as troublesome as it is a common Chinese surname shared by the current President.
Jobs Data Hiccup
There was some economic data to digest this week, particularly in the jobs market.
- The jobs number on Friday was way below expectations. The headline number was 210K jobs created in November compared to an expectation of 530K.
- The jobs number is very volatile month-to-month, so perhaps the very low 4.2% unemployment reported is more indicative of what is happening on the ground.
The Week Ahead
Still Going Up
Inflation will retake center stage next week as America’s consumer price index (CPI) numbers for November are released Friday.
- All eyes remain on inflation as the Federal Reserve is becoming more concerned with the longevity of the rising prices we have seen this year.
- The annualized number is projected to hit almost 7%, up from the 6.2% reported for October.
- The core CPI, which ignores the more volatile energy and food prices, is expected to rise to just under 5%, up from 4.8%.
- If the numbers come in as expected, the Fed will be forced to take a more serious look at accelerating the pace of tapering its asset purchases.
Next week could be key in determining the risks of the new Omicron Covid variant as scientists work tirelessly to determine the associated risks of this new strain.
- Since the announcement that another Covid-19 variant has been detected, markets have been cautiously proceeding.
- As more data is released with information about transmissibility and vaccine effectiveness, markets will be quick to react to anything positive or negative.
End of an Era
German Chancellor Angela Merkel is set to step down next week after 16 years in office.
- During Germany’s September Federal election, Merkel became the first incumbent Chancellor not to seek re-election.
- Olaf Scholz will succeed Merkel, who leads a new three-party coalition government.
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