The Week in Review: December 6, 2021
Enter Omicron; Powell Retreats from Transitory
Black Friday turned into Bleak Friday for short-term investors. The Dow Jones Industrial Average shed 905 points (-2.5%), its biggest one-day loss in 13 months, according to data from the St. Louis Federal Reserve.
The discovery of a new COVID variant, dubbed Omicron, darkened the mood on the holiday-shortened trading session. We saw continued volatility last week.
With the advent of vaccines and better treatments, investors shrugged off the rise in cases caused by the Delta variant. Today, these are the tools primarily used to defend against the pandemic. They aren’t foolproof, but they are used in place of economically destructive lockdowns and tough social-distancing restrictions.
It’s unclear what kind of threat Omicron poses to the economic expansion. It’s still early, but various reports suggest that current vaccines and treatments may be less effective against the new variant.
But it has also been suggested that symptoms are milder. Given the economic uncertainty, volatility has increased as short-term investors trade on headlines.
A More Inflation-Focused Fed?
On Tuesday before a Senate committee, Fed Chief Powell said it may be appropriate to “consider wrapping up the taper of our asset purchases ... perhaps a few months sooner,” amid strong economic growth and rising inflation. His remarks added to last week’s uncertainty.
In early November, the Fed said it would begin tapering its $120 billion in monthly bond purchases by $15 billion per month in November and again in December. Economic conditions would dictate the pace in 2022. At $15 billion per month, bond buys would end in June.
If the Fed decides to unwind its purchases at a faster pace, we could see a rate increase sooner rather than later.
Bottom Line
Stubbornly high inflation is forcing Powell’s hand. Notably, Powell said, “It’s probably a good time to retire that word (transitory),” when it comes to this year’s burst in inflation.
Some would argue the Fed has fallen behind the curve and should have wrapped up its bond-buying program by now, which would give it more flexibility to gradually raise interest rates.
The U.S. Bureau of Labor Statistics just reported that the unemployment rate fell to 4.2% in November. It also reported that the Consumer Price Index hit a 30-year high, while the U.S. Bureau of Economic Analysis reported that gross domestic product (GDP) surpassed its pre-pandemic high.
But the fed funds rate remains near zero, and the Fed continues to buy bonds, though the pace is slowing. Put another way, the Fed has its monetary pedal to the metal, even as growth is strong and inflation is high. Given heavy fiscal stimulus, that can exacerbate inflation.
Unfortunately, price hikes have accelerated, and Powell has finally retreated from his often-used characterization.
If you have any questions or concerns, please don’t hesitate to let me know.
Two for the Road
S&P 500 companies are on track to grow profits by 41.5% year over year. —Kiplinger, November 24, 2021
The tight labor market and concern of COVID risk have created a shortage of Santas, leaving many organizations that run holiday events scrambling to find bearded men in red suits. Working Santas are raising their rates as high as $200 an hour. —The Wall Street Journal, November 9, 2021
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