The shortened holiday week ended on a sour note as global equity markets experienced a strong dose of volatility on Friday following news of the new Omicron COVID variant. We learned of cases spiking in South Africa and it is now believed the same trend may occur in Europe after numerous cases have been confirmed on the continent. Although this new variant is certainly not a positive development, it is important to step back and focus on the fact that we are very early in the Omicron data cycle. The market’s reaction on Friday may not have been entirely warranted and we continue to believe that the fiscal health of consumers – in aggregate – does not justify an elongated period of sustained market and economic volatility. The key word here is elongated because we believe the likelihood of newfound short-term volatility across global equity markets remains probable. Such probability, however, should not be immediately associated with the latest COVID news. Our recency bias must be placed in check when assessing the potential for volatility because the market rarely reacts negatively solely to one data point. The mirage that is often created by shocks, or some other exogenous occurrence, triggers immediate cause-and-effect thinking that we believe is detrimental. The broader financial media provides a tremendous backdrop for deciphering events in such an easy manner. From a purely historical standpoint, however, global equity markets remain seasonally apt to short-term downside movements, a notion that has nothing to do with COVID. The new variant may simply be a very short-term catalyst for volatility, yet it is not likely to generate downside like what we experienced in early 2020. Relative to last year, we now know more about COVID, we know more about its impact to business and to the economy, and we know notably more on consumers’ consumption responses to potential forced shutdowns. Most importantly, we know more on how the labor market will react through the eyes of the "work-from-home" experience and we would argue that the likelihood of government-forced shutdowns remains miniscule when considering domestic vaccination rates. This approach may not be reciprocated in Europe, South America, or Asia, and we foresee opportunities for strong equity market entries in those segments if such an approach were to be adopted.
As we step away from the early news cycle of the Omicron variant, we want to shed light on additional objective data factors that are likely to have a material impact on markets. Our commentary last week focused on the health of consumers amidst an inflationary environment that is being met by record high saving rates, unwavering demand for goods and services, and a still evolving supply chain. We can make a plausible argument that the Omicron variant is likely not the last variant we’re going to see, nor might it be the most (or least) severe. These are things that no one can accurately predict. What we can extrapolate from the current data, however, is that the propensity to consume, and the desire to shed off excess consumer savings, remains highly intact. We see this through the eyes of the struggling supply chain, new orders for inventories, and we also see it through the positive response that consumers have generated from higher prices at the gas station, grocery store, car dealership, and everywhere else. The push of higher prices to consumers has been met with open arms, which is unlike any other historical comparison of such a phenomenon. Along those lines, another data point that deserves merit is the general earnings guidance that major S&P 500 companies have put forth, which has established a consensus of sustained margins for major companies. The unwavering consumer demand remains intact and there is little to suggest it will break down. In fact, it may accelerate as we see higher wage growth data further bolster the need for labor capital across the country. We will have a clearer picture of how wage data transpired by year-end when we gain perspective on overall hourly wages for seasonal employment by large retailers. Our assessment is one of notably higher unit labor costs, which is something investors should anticipate. This is likely to keep broader inflationary data elevated through the early part of the new year.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All return data sourced from Bloomberg. All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations. Small Business Optimism sourced through NFIB. Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan. Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites. Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate.