American markets today, Monday, viewed several hours before the 9:30 a.m. Eastern time opening, look poised for a serious drop, with the S&P 500, NASDAQ and DOW very much in negative territory although the S&P 500 is struggling to move up. Traders and analysts are trying to assess the impact of the fast-spreading Omicron virus and have noted Federal Reserve Chair Jay Powell’s belief that it makes it more difficult to forecast a path to recovery, as it poses "downside risks to employment and economic activity and increased uncertainty for inflation." The cancellation of the World Economic Forum in Davos can be read as a belief by forum organizers that the spread will continue well into the New Year.
They are also assessing the fate of United States President Joe Biden’s US$1.75 trillion domestic investment bill following Senator Joe Manchin’s very public withdrawal of his support. Driving the point home, Goldman Sachs trimmed its quarterly GDP forecasts for 2022 following Manchin’s decision. Following what some have termed ‘the Manchin surprise’ the best-case scenario at this point – if the bill survives – is a revised version in January
Canadian markets are also headed down.
European markets have already opened at time of writing and are headed down with the FTSE 100, DAX and CAC40 deeply in the red, pushed down by ever-increasing travel restrictions and lockdowns.
Amongst currencies the British pound sterling and Canadian dollar are down against the American greenback while the Euro is struggling to stay in the green. The pound is being weighed down by several factors, explains Lawrence Kaplin, Market Analyst at London based payments specialist Equals Money.
“Despite the Bank of England raising interest rates for the first time in over three years last week, sterling ended Friday’s trading session below pre rate hike levels. The brief rally posted immediately after the announcement faded away as data from the services sector which accounts for over 80% of United Kingdom gross domestic product showed the rate of growth has now fallen to its lowest since February of this year,” Kaplin says.
“News of France and Germany closing borders to UK citizens also weighed on sterling as Europe acts swiftly to try and slow down the rapid spread of Omicron.”
Amongst precious metals gold and silver are down.
That follows Friday’s session, weighed down by large cap tech companies as investors parsed the Federal Reserve Bank’s decision to end its stimulus program sooner than previously expected with three interest rate hikes during 2022. Microsoft Corp., Alphabet Inc. and Oracle Corp. dropped by $1.10, $54.40 and $6.61 respectively although in Oracle’s case a part of the drop is attributable to reports of its intention to take over medical records organization Cerner Corp. which then surged by 12.0% .
Not all big names dropped. AMC Entertainment Holdings Inc. and GameStop Corp. both ran higher after long declines. AMC Entertainment shot up 18.77% and GameStop ran up by 7.59%, though both are well short of their highs during the meme-stock episode earlier this year.
Last week’s results, and those of the preceding weeks provide proof of several brass-tacks realities that we need to keep clear in our investment decisions in 2022.
Volatility ranks at or near the top of the list and there are a handful of contributing villains including the possibility of a continuing scare with the Omicron virus and whether it will be followed by another one that will supplant it in the same way that it has supplanted the Delta virus. Pfizer Inc.’s forecast on Friday that the COVID-19 pandemic would not be behind us until 2024 and that a lower-dose version of its vaccine for young children brought a weaker response than anticipated reinforces the frightening COVID horizon.
It is reasonable to suspect that we will face another virus scare and with it more market volatility. In the strongest recent example, markets plunged brutally in a sell-off on Friday November 26 with the news of the Omicron variant.
The S&P500 Nasdaq and Eurostoxx fell by 3% but later recovered most of losses. The extent to which new viruses will affect markets and market volatility is obviously impossible to predict except that the possibility of another virus and another plunge cannot be dismissed. At the same time, some believe that a form of ‘covid fatigue’ has started setting in and that the market is becoming accustomed to swings induced by COVID news.
Moreover , we can expect supply chain problems to continue until at least part way into 2022. It is also clear that such specific issues as oil prices doubling over the last year, the shortage of microchips for automobiles and consumer electronics and disruptions to supply chains caused by reduced capacity during the first wave of the pandemic are contributing to these very rapid increases. Snarls, delays and increased shipping rates have confused the issue immensely. Notwithstanding the insistence from some politicians that the snarls will disappear, they still occur, and empty shelves still greet otherwise willing buyers.
Also contributing to volatility, higher prices appear likely to hang over both investors and consumers next year, especially if the strong job market continues to put pressure on wages. As for inflation, the formerly soothing sobriquet ‘transitory’ seems to have dropped from Federal Reserve analyses.
Each of these factors could generate volatility but they are not mutually exclusive and taken together will have an impact on economic growth and stability in 2022.
“The only reliable trend in markets right now is wilder swings …” proclaims a Bloomberg analysis.
And I agree.
Disclosure: I do not own any shares in any company mentioned in this column.
Al Emid is a financial journalist, broadcaster and author with two books underway.
The Emid Report on Volatility 2022 is scheduled for release in January 2022 and his book on overseas investing is scheduled for release in January 2023.