During the month of November, a battle has raged between optimism over strong economic growth driven by consumption along with astonishing Q3 business results, and pessimism over the latest inflation data and the spread of COVID around the world. Finally, the indices ended up succumbing to fears and uncertainty about the new Omicron variant and a more Jerome Powell hawkish than what we are used to.
S&P -0.8%; Dow Jones -3.7%; Nasdaq +0.2%; Russell2000 -4.3%;
STOXX 50 -4.4%; Ibex -8.3%
USA
At the beginning of the month, the FOMC meeting took place, at which the beginning of the reduction in purchases was announced (tapering) by the Fed since this month of November with the aim of ending the program in June 2022.
Although it may be surprising, the Equity and Fixed Income markets celebrated during the session with significant increases thanks to:
- Tapering prudent, reduction in the pace of purchases slower than expected.
- Interest rates between 0% and 0.25% in the short and medium term, considering inflation as something transitory (temporary, not structural).
Considering that the beginning of the tapering At the end of 2021 it was already discounted by the stock markets, the Fed's policies and message gave tranquility and optimism to the market, clearing up unknowns about its plan and acting to calm inflation. These measures will depend mainly on the evolution of employment and inflation data.
At the end of the month, in new statements, Powell for the first time stopped talking about inflation as something “transitory”, something that always calmed the markets. Additionally, it opened the possibility of accelerating the pace of reduction in purchases, as well as rate increases. Obviously, the markets did not expect this speech, so they reacted with sharp declines.
The biggest concern continues to revolve around inflation and will remain throughout 2022. The CPI published this month rose by 6.2%, the largest increase in 30 years. Most of the inflation is still tied to energy (natural gas and oil), and used cars (due to problems in supply chains and therefore the inability to manufacture enough new vehicles). After this inflation data, the Fixed Income market reacted with sales of the American bond, with the consequent rise in yields (yield).
Controlling energy prices and solving bottlenecks in supply chains continue to be the main problems to be solved. Considering the beginning of the tapering by the Fed, the measures that are being taken to solve the problems in supply chains and the increase in new hiring in the labor market, it is expected that throughout 2022 we will see a significant decrease in inflation.
To all this, we must add a new element to the board: the new COVID variant, Omicron. Despite the current lack of knowledge of this new threat, investors quickly put themselves in the most pessimistic scenario, reacting with strong general sales due to fear of global restrictive policies (confinements, border control, etc.) to control the spread of the virus.
On the contrary, the growth of the economy is undoubtedly the biggest driver of the stock markets. After the “stop” in GDP growth in Q3 (2%), the latest forecasts estimate that it will accelerate to an incredible 8.2% in Q4, although it could ultimately be lower as a result of the fear of Omicron.
The completed Q3 earnings season has been amazing. We've seen ~75% of S&P companies beat revenue and profit forecasts, with average year-over-year (YoY) growth of ~18% and ~40% respectively, the third and second highest since 2008. Estimates for 2022 have also been revised revised upwards.
It is worth highlighting the better than expected results published by the large retailers such as Walmart or Target, which reflect that consumption, the main engine of an economy, is very active.
Regarding the labor market, there is the “problem” that there are more jobs available than professionals willing to fill them. Taking into account the large number of professionals who are leaving their jobs instead of returning to them, the adoption of automation and robotization in companies is taking on a very relevant role sooner than expected, a trend that will undoubtedly continue in the coming years. . It is also necessary for job growth to continue accelerating in the coming months to solve problems in supply chains.
The unemployment rate fell to a staggering 4.2%, below what was recorded at the beginning of the pandemic (4.4%).
China
He crackdown towards technology companies continues to penalize the Asian giant's stock markets. The company Didi, the 'Chinese Uber', has announced that it is leaving the New York Stock Exchange for Hong Kong after pressure from Beijing. The distrust of investors towards the country due to the instability generated by regulatory pressure is reflected in the enormous falls that large Chinese technology companies are suffering in 2021, such as Alibaba -50% YTD or Didi -63% since their IPO.
Eurozone
The president of the ECB, Christine Lagarde, left several notable messages:
- Rate hikes are highly unlikely before 2023.
- He is not going to tighten economic policy “ahead of time”, which could put the recovery at risk, since inflation will decrease.
Regarding the bond purchase plan, he will provide more detail at the December meeting.
The spread of the new variant of COVID is causing countries such as Austria, Brussels or Germany, where the vaccination rate is low, to impose restrictive measures to control it. Of course, these are not being well received by the market, especially by cyclical companies or companies linked to tourism.
On the other hand, inflation in the euro zone reached 4.9% in November due to the increase in energy costs.
And here is the first part of my analysis of the financial markets in the month of November. Stay tuned to the Financial News Blog for the second and last part of the publication.
Dan Benbunan
Portfolio Manager
I think it is a very interesting and accurate analysis.
Thank you