Weekly Economic Update

Economic Update 11-29-2021

  • In a holiday-shortened week, economic data included stronger personal income and spending, as well as recovering consumer sentiment, while durable goods orders fell back. Housing data was strong in both new and existing home sales.
  • Global equity markets were benign until Friday, when the emergence of a new Covid variant rattled investors. U.S. treasury bonds fared slightly positive due to flows away from risk, while credit and emerging market bonds fell back. Commodities also fell back, highlighted by a rapid correction in the price of crude oil.

U.S. stocks experienced a unique holiday week, where volumes tend to be normally slow. By sector, communications, technology, and consumer discretionary suffered the largest declines (over -3%), the latter in leisure/travel largely, while energy ended the week as the only gaining industry. Real estate fell back, along the middle of the pack.

Financial markets were certainly pleased Monday morning by President Biden’s re-nomination of Jerome Powell for another term as Federal Reserve chair. The other leading candidate was Fed governor Lael Brainard, seen as more dovish and likely to keep lower interest rate policies in place for longer. While markets have often rewarded dovishness, it appeared the ‘known’ was valued a bit more than the ‘unknown’, particularly during this stretch of higher inflation. Rather, Brainard was nominated for Vice Chair for monetary policy, which could be a stepping stone for a later nomination to the main post. Markets do tend to prefer consistency above all else. Normally, these nominations aren’t as controversial, but the more progressive wing of the Democratic party has been unhappy with the current Fed’s lighter-touch handling of banking regulation (with Sen. Elizabeth Warren even going as far as calling Powell ‘dangerous’ in that regard).

Normally a light post-holiday trading day, stocks sold off sharply on Friday as a news of a significantly different Covid variant turned holiday sentiment negative. This variant from South Africa, now known as ‘omicron’, apparently contains a greater number of mutations (several dozen) and transmissibility than prior variants. With little known so far about its severity thus far, markets reacted first, presumably to absorb the details later, as they are prone to do. Aside from the obvious health concerns, the secondary impacts of slower consumer demand would threaten the global economic recovery and/or result in reimposed lockdowns or at least closures, as has been the case in recent weeks in Europe already. (Monday morning stock futures activity is strongly positive, as worries have already calmed a bit over the weekend.)

Foreign stocks performed generally in line with U.S. equities, with the U.K. faring slightly better, and Europe a bit worse. Even prior to the new South African variant’s emergence, increased Covid cases have caused more extreme governmental action in Germany and Austria. Now, travel bans are the next line of hoped-for line of defense against faster case rates. As has been the case for the past 18 months, threats to economic activity and stock earnings remain the primary driver of sentiment globally. Despite some flattening in growth as of late in Europe, manufacturing PMI has ticked upward.

U.S. bonds gained slightly, with a ‘risk off’ sentiment moving towards treasuries and pushing yields lower again—treasuries were among the only ‘winners’ last week, as expected. (It’s also the answer to the question of why to own government bonds when they’re paying a yield of under 2%.) Corporate bonds, on the other hand, fell back as credit spreads widened. Emerging market debt suffered more than other categories, down well over -2%.

Commodities fell back generally, as a sharp decline in the energy segment surpassed still-significant declines in industrial and precious metals, while agriculture gained. The price of crude oil plunged by over -10% to just above $68/barrel. Initially, announcements of U.S. and Chinese strategic petroleum reserve releases were intended to help alleviate fears over ongoing supply constraints (for the time being, at least); however, the 50 mil. barrel amount was smaller than the markets expected, resulting in a net price increase early in the week. OPEC+ will be meeting again in Dec., but has been resistant to raising production levels. This was a moot point by Friday, with the new Covid variant concerns causing an immediate -10% correction in oil prices, with recovery demand threatened. As is often said in the commodity world: ‘The cure for high oil prices is high oil prices.’

Period ending 11/26/20211 Week (%)YTD (%)
DJIA-1.9515.93
S&P 500-2.1823.91
NASDAQ-3.5220.91
Russell 2000-4.1314.68
MSCI-EAFE-3.727.41
MSCI-EM-3.62-3.50
BBgBarc U.S. Aggregate0.13-1.48
U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.
12/31/20200.090.130.360.931.65
11/19/20210.050.521.221.541.91
11/26/20210.060.501.161.481.83

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT

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