The Omicron Pivot?

Yun Li and Tanaya Macheel of CNBC report Dow tumbles more than 500 points to end a volatile week, S&P 500 sheds 1%:

U.S. stocks came under pressure again in Friday’s volatile session amid worries about tighter monetary policy and the ongoing pandemic.

The Dow Jones Industrial Average dropped 530 points, or 1.5%, to 35,366.56. The S&P 500 fell 1% for a second down day to 4,620.56. The tech-heavy Nasdaq Composite ended the session 0.1% lower at 15,169.68 after briefly trading in the green. At its session low, the Nasdaq dropped 1.5%.

The major averages posted a negative week with the Nasdaq being the biggest loser. The tech-heavy benchmark declined 3%, while the Dow and the S&P 500 slipped 1.7% and 1.9%, respectively.

Friday coincided with the expiration of stock options, index options, stock futures and index futures — a quarterly event known as “quadruple witching” that typically comes with heightened volatility.

The S&P financial sector was the biggest laggard on Friday after bank stocks outperformed in the previous session. Goldman Sachs lost nearly 4%, while Bank of America and JPMorgan both traded over 2% lower.

Many megacap tech shares traded in the red. Amazon and Microsoft both lost about 1%, while Alphabet and Meta Platforms also dipped 1% each. Microsoft has lose more than 6% this week alone, and Apple is down 5% on the week.

Shares of one-time EV darling Rivian tumbled 11% Friday after the truck maker said it will fall short of its 2021 production target.

Investors appeared to be rotating from high-growth tech names to consumer staples, as they continued to digest the latest move by the Federal Reserve along with rising inflation and the spread of the omicron Covid variant.

“As the Federal Reserve turns more hawkish and expectations for higher interest rates rise, investors are lowering exposure to growth stocks,” said Jim Paulsen, chief investment strategist at The Leuthold Group. “Typically, growth stocks exhibit a higher duration compared to value stocks because a higher proportion of their cash flows will be received in the more distant future.”

FedEx shares jumped 5% after quarterly earnings and revenue results topped expectations and it announced a $5 billion buyback. The shipper also reinstated its original 2022 EPS forecast.

Covid-19 vaccine makers Moderna and Pfizer are on track to be the biggest gainers in the S&P 500 this week, with weekly returns of 14% and 13% so far, respectively.

Earlier this week, the Fed announced a more aggressive plan to wind down its asset purchases, and that it is looking at hiking rates multiple times in 2022.

“Trading will remain very choppy for the rest of the year as investors grapple falling trading volumes over the coming sessions,” said Edward Moya, senior market analyst at Oanda.

It's Friday, we are one week away from Christmas Eve and most people will be preparing for the holidays as they grapple with the rise of Omicron cases:

Americans face an uncertain and anxiety-filled holiday season for the second consecutive year, as the highly contagious Omicron variant threatens to intensify an already alarming surge of COVID-19 cases.

Public health officials have voiced deepening concerns about the rising number of infections, warning that hospitals - still fighting the effects of the Delta variant - could find themselves stretched beyond their limits if the two variants combine to create a fresh wave.

While states have not sought to impose broad shutdowns, the disease's advances have prompted a new round of restrictions, as offices have postponed return-to-office dates, universities have moved exams online and some states and cities have reimposed mask mandates.

In New York City, several Broadway shows, including "Hamilton," "Tina" and "Mrs. Doubtfire: The Musical" canceled performances, citing breakthrough COVID infections among their cast or crew. In Puerto Rico, the finale of the Miss World beauty pageant was called off on Thursday after several contestants tested positive.

Dr. Anthony Fauci, the top U.S. infectious disease expert, said on Thursday that the Omicron variant would soon dominate infections.

"We've seen that in South Africa, we're seeing it in the UK, and I'm absolutely certain that's what we're going to be seeing here relatively soon," said Fauci, who met with President Joe Biden on Thursday afternoon to discuss the government's response.

In South Africa, the United Kingdom and Denmark, the number of new Omicron infections has been doubling every two days.

Preliminary data suggests Omicron may be more contagious than Delta but less likely to cause severe illness, though much remains unknown. Research also indicates that the two-dose vaccine regimens have vastly reduced protection against Omicron but that a third booster dose restores much of the vaccine's efficacy.

Experts have warned that Omicron could still have deadly consequences due to its transmissibility.

"When you have a disease that is highly infectious – even if it causes milder disease – you can still have many, many deaths, Dr. Celine Gounder, an infectious disease expert, said during a panel discussion at New York University on Thursday.

Maine set a record for the number of hospitalized COVID patients on Wednesday, a day after Michigan hit a new high. New Jersey recorded its highest number of cases on Thursday since mid-January, at the peak of last winter's surge.

Over the past month, new cases have risen nearly 40% to a seven-day average of 121,000 new infections per day, according to a Reuters tally.

Deaths have risen 18% since mid-November to an average of 1,300 lives lost a day. COVID hospitalizations have risen about 45% over the last month.

In New York City, the percentage of people testing positive for COVID-19 doubled in three days, according to Dr. Jay Varma, a senior public health adviser to Mayor Bill de Blasio.

"We've never seen this before in #NYC," he wrote on Twitter, adding that the only explanation is Omicron's ability to evade both natural and vaccine-induced immunity.

De Blasio announced the city would ramp up capacity at testing sites, which have seen long lines in recent days, and distribute 500,000 rapid at-home test kits through community organizations.

"This variant moves fast," he said. "We need to move faster."

New York Governor Kathy Hochul said the state would allow residents to request test kits be mailed to their homes, joining several other U.S. states.

U.S. President Joe Biden said on Thursday it is past time for people to get booster shots and urged them to do so as quickly as possible.

“We are looking at a winter of severe illness and death” for the unvaccinated, Biden said.


The surge has prompted worried Americans to reconsider holiday travel plans. Experts have said vaccinated individuals can travel safely as long as they wear masks and avoid unnecessary risks such as large crowds and indoor gatherings.

After months of planning a trip to Florida to see his parents for Christmas and his mother's birthday, Kalaya'an Mendoza of Queens, New York, told Reuters he was forced to cancel when he learned that several people at an event he attended on Monday had tested positive.

"I'm a little bit wrecked," Mendoza, 43, said on Thursday. "It feels like 2020 all over again. I had to weigh my very intense Filipino need to be with family with their care and safety."

Mendoza, who has not seen his parents since December 2019, said he was angry at how little progress the U.S. government had made on fighting the pandemic while spending billions of dollars this year on other items, such as the military.

"I remember watching my neighbors get carted away in body bags at the start of this pandemic, and two years in, we shouldn't be here," he said.

Oh, we are here alright, and it's a sad testament as to how politicized the pandemic and the response to it has been from many citizens who should know better.

It is mind-boggling that so many people all over the world refuse to get vaccinated even when experts tell them it's safe and reduces the risk of severe illness, hospitalization and death. 

Omicron is a game changer. It's a fast-moving freight train sweeping the world and it will infect millions over the next month, and hit the unvaccinated particularly hard.

It's virtually unstoppable and while boosters help, there are no guarantees and they don't stop how transmissible this latest variant is (still need to exercise extreme caution not to pass it to others).

Was the latest wave predictable? Of course it was. Travel bans don't work, we knew this. 

Epidemiologists have been studying sewage water at major cities and they detected a rise in Omicron over the last few days and even weeks in some cities, signaling an outbreak was imminent (studying sewage water is best way to uncover the truth because unfortunately people lie about having Covid symptoms or simply don't know yet).

Anyway, how the latest wave plays out remains to be seen but I expect cases will skyrocket all over the world, especially in the United States where experts warn we will reach over one million deaths related to Covid sooner rather than later. 

With cases doubling every 2-3 days, the math is dismal. There are legitimate fears that healthcare systems will be stretched beyond capacity mostly from incoming sick patients but also from healthcare workers calling in sick, unable to work.

Inflation and the fifth wave

Then there's the question of what effect Omicron will have on supply chains.

While most pundits claim it will further disrupt supply chains, especially in Asia, and reinforce inflationary pressures, this is far from certain. 

Preliminary evidence suggests Southeast Asia supply chains may be less vulnerable to Omicron:

The new variant emerges as conditions in the global supply chain are improving, but challenges are still faced. Many factories have reopened over the past several months across Southeast Asia, easing some of the pressure on Western companies, but labor shortages continue to limit production capacity in other countries. like Vietnam and Malaysia. Factories in the region are also facing rising freight rates and raw material shortages. That increases prices and longer delivery times for Western consumers.

However, many companies still hope Omicron won’t make things worse. The Wall Street Journal Vietnam, with its shift to adapting to the pandemic, is a factor that can help make the supply chain less disrupted by any future waves of infections.

Since the beginning of October, many factories have returned to normal operations. To date, about 55% of people are fully immunized and about 75% have received at least one vaccination. The average number of Covid-19 deaths per day in recent weeks is only half of what it was at the beginning of September. With the Omicron variant, the Government is still closely monitoring.

Again, with Omicron things move fast and this situation can change abruptly, but it's worth noting how resilient global supply chains are in spite of this new variant.

On US inflation stickiness

In the US, inflation remains a big concern and will likely factor in prominently during mid-term elections next year.

This week, when Yahoo Finance's editor-in-chief, Andy Serwer, asked Ray Dalio just how concerned he is about inflation, the legendary hedge fund manager responded: "I'm significantly concerned about it. Because the amount of money and credit that has to be produced and is budgeted, it is a large increase."

Dalio, who runs the world's largest hedge fund, Bridgewater Associates, has been sounding the alarm about soaring inflation — especially since last month, when an inflation report revealed consumer prices had their biggest gain in over three decades. In a LinkedIn post following that report, Dalio warned that "raging" inflation was eroding the wealth of Americans.

"Some people make the mistake of thinking that they are getting richer because they are seeing their assets go up in price without seeing how their buying power is being eroded. The ones most hurt are those who have their money in cash," he wrote.

Inflation is eroding the wealth of Americas, especially those on fixed incomes, the poor and working poor. 

But is inflation here to stay? This is where I part ways with Dalio and others because I remain convinced, now more than ever, the biggest risk remains deflation, not inflation.

 Inflation will likely peak toward the tailend of the first quarter, but it will remain elevated enough for the Fed to commence its anticipated rate hikes.

Here's where things really get sticky, for me at least.

Depending on how aggressive the Fed's response is -- and I have no reason to believe it will be especially after Powell's presser on Wednesday afternoon -- we might see a slight selloff in risk assets become a more severe selloff. 

Will stocks crash? Probably not but you can expect a lot more volatility and if inflation pressures don't abate in the near term, market participants will remain very nervous.

And some parts of the market are crashing, namely, hyper-growth stocks, which were very volatile this week but the downtrend remains intact.

Still, check out shares of Roku shares this week. After hitting a 52-week low of $190, they bounced on Wednesday and never looked back, up 24% from those lows:

I can guarantee you traders at top hedge funds and Ark Innovation Fund were all over this stock this week.

But before you get too excited, check out the 5-year weekly chart:

The latest bounce is right above the 200-week exponential moving average but the downtrend remains intact (in other words, trade the daily but be mindful of the weekly!).

The Fed and Scars of 2018

So much anticipation of the Fed's meeting this week.

Let's read the statement it released:

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but continue to be affected by COVID-19. Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation having exceeded 2 percent for some time, the Committee expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment. In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities. Beginning in January, the Committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage‑backed securities by at least $20 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve's ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.

Apart from accelerating the reduction of its monthly bond purchases, projections released Wednesday indicate that Fed officials see as many as three rate hikes coming in 2022, with two in the following year and two more in 2024.

Of course, these are projections and it all depends on what happens in the financial markets.

Importantly, if another financial crisis erupts, all bets are off, and the Fed will intervene.

Powell hinted at this in the presser stating he remains "flexible" and if the economy slows, the Fed will act forcibly. 

I personally believe scars of Christmas 2018 remain on Powell's mind and he used the presser to ease fears.

As far as whether he remains behind the inflation curve, I actually agree with Paul Krugman and other economists who have suggested that the current inflation looks more like 1946-48 than like the 1970s:

Could the Fed get inflation under control a lot easier this time around?

Yes but this outcome critically hinges on the US avoiding a) a financial crisis and b) a recession.

And as Francois Trahan keeps reminding me, read Ed Leamer's paper on "Housing is the Business Cycle", it tells you everything you need to know about recession risks, and they are elevated right now. 

Let me end by showing you S&P sector performance this week:

As you can see, defensive sectors outperformed with Healthcare (XLV), Real Estate (XLRE), Utilities (XLU) and Staples (XLP) leading the charge. 

Cyclical sectors leveraged to the economy underperformed this week led by Energy which was down 5% this week.

Will defensive sectors lead the way next year?

It depends who you ask. In his weekly market wrap-up, Martin Roberge of Canaccord Genuity notes this:

Our focus this week is on the sharp bounce in defensive sectors, namely consumer staples, utilities, REITs and health care. All four sectors are closing the week at a 52-week high. Such a feature would usually signal that investors are growing nervous on the market. However, we are not convinced since relative to the market, the first panel of our Chart of the Week depicts a different story, one where this week’s rally could be just an oversold bounce. The reality is probably in between, as corroborated by the sharp flattening of the bond-yield curve lately. At ~75bps, the US 10y-2y curve is getting closer and closer to the 50bps level below which defensive sectors staged a multi-week bout of relative outperformance in H2/18 (second panel). Moreover, for now, it is the rout in growth stocks that has fed that rally in defensive stocks. This suggests to us that a rate shock rather than a growth shock remains the primary risk for equities. We can deal with this risk, since a recession is a low probability in this environment. However, the day this dynamic changes and defensives stocks are fuelled by a rotation out of value stocks is the day we will get worried. Again, this scenario is more likely if the US 10y-2y curve drops below 50bps. Until then, investors should stick to a cyclicals > growth > defensives strategy, in our view, with some selective protection in health care, REITs, and household products.

Below, vaccine scientist Dr. Peter Hotez is worried about the instability of the US healthcare system in the face of Omicron. MSNBC discusses with Dr. Irwin Redlener.

Second, Gillian Tett writes that the US economy is doing quite well (e.g. goods consumption) but also quite poorly (e.g. consumer sentiment) and asks how to reconcile conflicting signals. Jeff Snider reacts live to the Financial Times columnist, suggesting new models are unnecessary. 

Great clip, Snider is a master at pointing out the important trends in the economy and relating them to financial markets.

Also, take the time to watch Jerome Powell's press conference. The key question came around 30 minutes in and his response was telling. 

Lastly, Chris Toomey, Morgan Stanley Private Wealth Management, joins the 'Halftime Report' to discuss whether he sees omicron or the Fed's tightening as more of a threat to markets.