Before The Bell
In a low trading volume, low volatility environment, stock futures seem to be confirming an end to the “Santa Claus” rally today. Still, the Standard & Poor’s 500 Index is at a record level, apparently set to end 2021 with an impressive full-year advance of about 27%. The Dow Jones Industrial Average and the NASDAQ are not far behind, each being on track to post near-20% gains for the year. Notably, the NASDAQ has lagged the performances of the other two major indexes over the past month, as investors shift their money away from high-priced, high-flying tech stocks toward cyclical and value issues.
There was good news on the economic front this week. First, although the S&P CoreLogic Case-Shiller National Home Price Index indicated an easing of growth in large metropolitan areas for the year ended October 31st, the level of expansion remained favorable. Second, though U.S. pending home sales for November declined following an increase in the prior month - likely due to low inventories and buyers’ hesitancy to pay up for houses - the market was still healthy on a historical basis. Third, the Conference Board Consumer Confidence Index for December improved, building on a positive showing in November. Lastly, domestic jobless claims for the week ended December 25th were lower than many economists had expected, indicating a continued recovery in employment. Even if more people enter the workforce, the unemployment rate could soon dip below 4%, since businesses are keen to add to staff.
Thursday’s equities activity was sedate, with few market leaders making decisive moves. Overall, the market indexes were slightly lower on the day. Some standouts were online social platform Twitter (TWTR), rising 4%, and Beijing-based Internet search engine Baidu (BIDU), rebounding over 10%. Meanwhile, drug developer Biogen (BII) fell more than 7%, while memory-and-storage device maker Micron Technology (MU) fell 2.4%. Cruise ship operators Carnival (CCL), Norwegian (NCLH), and Royal Caribbean (RCL) also came under some modest selling pressure - their shares posted low single-digit declines - with the Centers for Disease Control advising consumers, even if vaccinated, to delay travel bookings while the Omicron coronavirus variant is running through the general population.
We anticipate a further improvement in share prices, albeit likely a less dramatic one, in 2022. Near-term volatility cannot be ruled out, however. Most important, Omicron is infecting the population at a fast rate. Fortunately, given the levels of hospitalization, the variant does not appear to be as severe as the Delta strain, and vaccines and treatments should help to keep the virus contained. Another issue for investors to keep watch of is inflation and the Federal Reserve’s reaction to it. Materials, components, and consumer goods pricing pressures may well dissipate in the coming months, assuming better corporate management of the global supply chain. Also, with no new government stimulus payments, more people will probably to return to work, relieving wage inflation to a degree. Geopolitical issues, especially those involving the United States, Russia, and China, could produce significant economic uncertainties, prompting volatility in the stock market. Furthermore, investors need to keep close tabs on the upcoming corporate earnings season and managements’ guidance for the rest of 2022. Despite these potential headwinds, however, prospects appear favorable. At this juncture, portfolio rebalancing trends seem to favor industrials, financials, healthcare, and energy stocks, especially those paying a dividend.
– David Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
