New Concerns in the Markets

November was a down month for stock markets as new worries on a COVID variant along with the actions of the Federal Reserve were front and center on investors’ minds.  Both bond and stock markets were significantly more volatile as concerns about future actions and repercussions of potential government actions caused investors to re-examine risks. 

The S&P 500 was down 0.69% for November, with the negative movements concentrated in the back half of the month.  On November 26, news of a new COVID variant, now titled Omicron, caused the worst daily market performance since October 2020.  Governments rushed to adjust flight restrictions and examine populations for evidence of the variant while scientists and drug providers began the process of assessing the impact.  The bond market also displayed characteristics of a “risk-off” trade as well – with US treasury rates falling (leading to rising US Treasury bond prices) and some selling of higher risk bond assets like investment grade and high yield corporate bonds. 

As of now, we know very little about the impact of Omicron on long-term business fundamentals.  The digestion of news forthcoming will likely create a more volatile market than we’ve seen in recent months, but this added volatility may go in both directions.  If Omicron has a more severe impact on individuals and causes a re-establishment of restrictions, then the market is likely to experience a decline.  If Omicron is determined to be controllable and does not alter the prior trajectory of re-opening, then the markets could experience a snapback rally that continues into 2022. 

In other news, comments made from Chairman Fed Jerome Powell on November 30 also suggested that elevated inflation may be with us longer than anticipated.  Noting continued supply constraints along with potential Omicron effects, Chair Powell laid out a stance that could include an accelerated pace of reduction in bond purchases by the Fed.  This commentary led investors to believe that rate hikes may be coming earlier, and at a faster pace, than suggested prior. 

While the concerns of Omicron and Fed action are relatively new, concerns about issues and the effect on market trends are as old as the markets themselves.  There is ALWAYS something to be concerned about.  When markets are rising, it feels like they can’t go up forever and are “due” for a decline.  When markets are falling, it feels like there is no bottom.

Our stance remains that, over the long term, markets follow business fundamentals.  This includes the health of the economy, the health of businesses within these economies, and the valuation (or what we pay) for these businesses.  It is our opinion that nothing we have seen thus far necessitates a change in our outlook.  Reducing the level of support by the Fed does not change how a company generates more business to increase revenues and earnings.  Omicron could have an effect, but it is too early to make the call that this variant will have a significant impact on the healthy US consumer to go out and spend money.

The important part is not to get caught up in the noise and instead focus on the investment plan.  The plan should include taking enough risk to meet your long-term investment objectives but is also prudent and has some level of protection from decline.  Allow yourself to be nimble to market changes and take advantage of the opportunity, but not so aggressive that it shifts you dramatically away from your risk tolerance or risk ability.