Stocks fell sharply in Friday’s holiday-shortened trading, as news of a new COVID variant was followed by governments closing borders to limit its spread.
The news of the variant, discovered in South Africa and dubbed Omicron, is a reminder that the evolution of the pandemic remains a risk for the global economy. While there are many unknowns surrounding the new variant, we recommend staying the course with long-term investment plans and have the following observations.
We continue to see positive economic developments that support further stock gains (discussed below). While the pandemic remains a headwind for the economy, there are major supports for further growth. These include a healthy consumer with pent-up demand, and growing corporate profitability that is supporting corporate investment spending and a healthy labor market. Monetary policy remains accommodative and additional fiscal spending is in the pipeline. Barring a full lockdown like we saw early in the pandemic, these factors should support further economic improvement.
Meanwhile, stocks are already rebounding from Friday’s selloff after some positive developments over the weekend. Doctors in South Africa, where the strain first emerged, have said that the symptoms so far have been mild and pharmaceutical companies have suggested that vaccines could be adapted quickly if necessary.
While Delta caused new waves of the pandemic, variants that were initially feared to be a concern have faded from memory without causing widespread harm. There has also been recent positive news on the therapeutic front with new drugs to treat already infected patients.
Given the effectiveness of vaccines, boosters, new therapeutics, and societal adaptation to the pandemic, we see the probability of major lockdowns as low. History also shows that periods of high stock market volatility present good entry points for patient long-term investors.
Meanwhile, the incoming economic data continues to show an improving economy as evidenced by last week’s releases.
Philly Fed Shows Expansion Broadens across States: The Philly Fed state coincident indexes increased in 48 states in October, declining only in two states. This reading indicates a broad-based, above-trend economic expansion across states, with improvement in both the breadth and strength of the expansion.
Business Surveys Consistent with Healthy Growth: While the Markit Flash U.S. Composite PMI (a timely business survey) ticked down in November, led by a pullback in services growth, the index remains above its historical average, as business activity continues to expand at a rapid pace.
Despite supply-chain issues and higher inflation, business optimism about the 12-month growth outlook picked up, supported by expectations of strong future demand, and hopes of improvement in supply chains and labor markets.
Jobless Claims Drop to Lowest Level since 1969: Initial claims for unemployment insurance plunged 71,000 last week to 199,000, falling below its pre-recession level and hitting the lowest reading since November 1969. The steep decline in jobless claims reflects the rapid tightening in labor market conditions, increased business efforts to retain staff, and reduced worker reliance on government income supports. This is a positive signal for compensation and consumer spending growth next year.
All of this has us remaining optimistic on our outlook for the economy and stocks as we head toward 2022, despite the uncertainty that the pandemic continues to bring.
This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed here. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s prior written consent. This presentation has been prepared by Janney Investment Strategy Group (ISG) and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. For additional information or questions, please consult with your Financial Advisor.