Before The Bell
It was a rollercoaster ride for investors during the most recent five-day stretch of trading that in the end saw the major averages under some late-week selling pressure. Investors were unnerved by a number of events, including reports showing a notable rise in COVID-19 cases as the Omicron variant quickly spreads, a continued spike in inflation, and signs that the central bank will try to curb the higher inflation by cutting back on its monetary support and removing some of the excess liquidity in the financial system. Although investors initially took the Federal Reserve news in stride, with the averages rallying in the hours immediately following the release of the monetary decision on Wednesday afternoon, the realization that the central bank plans to aggressively reduce its monetary support in the year ahead eventually took a bite out of stocks.
This morning, there has been a global market selloff, with the worries about the aforementioned spread of the Omicron variant of the COVID-19 virus and its impact on global output, particularly in Europe where lockdowns are becoming more prevalent. This is hurting the stocks that investors thought would be beneficiaries of the economic reopening. The travel and leisure stocks are under heavy selling pressure in pre-market action, with all the airline stocks in negative territory. The technology stocks are weak again, too. News over the weekend that West Virginia Senator Joe Manchin would reject President Biden’s $2 trillion tax-and-spending package, which would reduce fiscal support for the economy, led a few of the big banks to reduce their economic forecasts for next year. Overall, the U.S. equity futures are pointing to a sharply lower opening stateside. On a positive note, reports surfaced this morning that the booster shot from pharmaceutical company Moderna (MRNA) is showing good effectiveness against infection from the COVID-19 Omicron variant in lab tests.
There was movement out of some of the high-growth sectors (i.e., technology) on Thursday and Friday, and into some of the safer and more-defensive areas, including the higher-yielding equity groups. (That trend is again on display this morning.) Fixed-income and gold, also seen as safe-haven instruments, are in high demand, with the price of the commodity climbing above the $1,800-an-ounce mark. It is also the main reason why bond yields pulled back late last week despite elevated inflation figures and signs that the Fed will cut back notably on bond purchases in the coming months. Yields move inversely to the prices of bonds.
The pull back in yields, with the rate on the benchmark Treasury settling at around 1.40% on Friday (and moving lower again this morning as investors seek the safety of fixed-income instruments), hurt the financial stocks, which played a big part in the more-than-500-point drop in the Dow Jones Industrial Average on Friday. The energy stocks were also under pressure, as worries about rising COVID-19 cases and the impact they may have on global output, raised concerns about growth going forward. The recent narrowing of the spread between short- and long-term bond yields also has brought concerns about slowing growth down the road, especially if the Federal Reserve pumps on the monetary support breaks, which it signaled that it plans to do in 2022 to try to get inflation under control.
Looking ahead to the abbreviated trading week (the market is closed on Friday for Christmas), the focus of Wall Street is likely to be on the surge in COVID-19 cases and data on the economy. The latter will put the focus on the health of the U.S. consumer, with reports due on consumer confidence (Wednesday) and personal income and spending and consumer sentiment (Thursday). These releases also may shed some light on how the all-important holiday shopping season for the retailers has gone. In addition to the consumer data, we will get reports on new and existing home sales, durable goods orders, and the final revision to the third-quarter GDP estimate.
– William G. Ferguson
At the time of this writing, the author did not have positions in any of the companies mentioned in this article.
