Stock market volatility continued last week with concerns about the Omicron variant of COVID and a more hawkish tone from Federal Reserve Chairman Powell.

However, the incoming data remains consistent with a strong economy and although the Omicron variant could potentially slow this momentum, similar to the impact from Delta, we do not expect it to derail the recovery. The history of the Powell Fed suggests he will only pursue tighter monetary conditions if the economy has enough momentum to handle higher interest rates. We reiterate our stance on staying the course with long-term investment plans and have the following observations.

Business Surveys Remain Encouraging: At the beginning of every month, we get timely business surveys on both the manufacturing and service sectors of the economy that provide important insight into the current state of private sector economic activity. Encouragingly, these surveys continue to show an economy with significant momentum.

The ISM Services PMI rose to another record high in November and marking the fifth time this year a new record has been set as services activity surged. All 18 ISM industries expanded, a sign of a healthy broad-based expansion. Much of the elevated reading can be attributed to the indexes for business activity and new orders, which also both sit at all-time highs. Notably, the business activity index surged in November, proving Americans are itching to be out despite increasing COVID fears. Survey comments continue to be dominated by discussions related to supply-chain shortages, signaling the possibility of even faster growth in the service sector if these problems can be fixed.

The ISM Manufacturing PMI also ticked up in November. While off its peak earlier this year, the index is near its highest level since May 2004, indicating strong factory activity growth, and consistent with an above-trend expansion for the broader economy. The combined latest services and manufacturing PMI readings correspond to 7.0% annual economic growth, indicating a strong economic expansion into year’s end.

Labor Market Progress Continues: The monthly jobs report is also a closely watched economic reading and includes two measures—the household survey that measures labor force status, including unemployment, and the establishment survey that measures nonfarm employment, hours, and earnings by industry.

While the headline payroll job growth number from the establishment survey missed expectations, up just 210,000 in November (prior two months revised up 82,000), the household survey—used to calculate unemployment—jumped 1.1 million, with the number of unemployed down 542,000. Encouragingly, labor supply rose 594,000, taking both the prime age and overall labor force participation rates up as workers re-entered the labor market.

While the payroll and household series can diverge, they are both consistent with a labor market that continues to heal from last year’s hard lockdown. Net, payroll employment is 3.9 million below its pre-COVID peak, while households are 3.6 million below. To put those in perspective, JOLTS job openings are 10.4 million. Given this historically high level of job openings, we see further labor market progress in the coming months.

Stay The Course Despite Shifting Fed Stance: Stocks sold off last Tuesday after comments from Federal Reserve Chairman Jerome Powell signaled that the Fed will consider accelerating the pace of tapering bond purchases at its next meeting in December with a view to concluding bond purchases (known as quantitative easing) a “few months sooner” than currently planned, in spite of the emergence of the Omicron variant.

Importantly, the Powell-run Fed has proven to be highly data dependent, including heading market stress signals, throughout his tenure. The currently very accommodative monetary policy was in reaction to pandemic- induced financial stresses and we expect normalization of interest rate policy to only occur in unison with further strong economic readings (which created the inflationary pressures) and relatively low financial stress readings. This implies higher interest rates only in response to a healthy economy (that supports profit growth and ultimately stock prices) that is capable of handling higher interest rates. The healthy economic signals and healing labor market cited above support the removal of emergency monetary policy.


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