Stocks took investors on a wild ride last week as the Omicron variant and Fed comments upended market expectations.
The Dow Jones Industrial Average fell 0.91%, while the Standard & Poor’s 500 stumbled 1.22%. The Nasdaq Composite index dropped 2.62% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, lost 0.62%.1,2,3
The full market report is posted at the end of this letter, but I don't need to dive into the details to find a number that is very much worth highlighting. At the bottom right of the table above we see that small-cap growth stocks are now up only 1.19% this year after getting whacked by 4.15% last week. That corner of the style-box is now behind inflation while the next-worst segment, small-cap blend is up more that the long-run return of the stock market as a whole or the S&P 500.
The lesson? A reminder that diversification is more than just owning a large number of stocks. You have to be diversified in equity style by owning Large, small, and companies in between; and own growth companies as well as value companies and firms that have characteristics of both styles. That way you don't find yourself in the corner of the style box that goes nowhere in an otherwise very good year.
A Tumultuous Week
Stock prices were volatile all week, swinging wildly after staging a modest recovery to begin the week. Omicron fears were not the only issue weighing on investors. Markets were also rattled by Fed Chair Powell’s Congressional testimony stating conditions warranted considering an acceleration of its bond purchase taper schedule. Last week’s roller-coaster action was epitomized on Wednesday when stocks rallied intraday by 520 points on the Dow Industrials, only to close the session lower by 460 points.4
Stocks staged a powerful rebound on Thursday on news that a second Omicron infection exhibited mild symptoms. Also helping the rebound was news that an agreement was reached in the House of Representatives to temporarily fund the government and word from President Biden that an economic lockdown was not in the plan to fight COVID this winter. Emblematic of the volatile week, stocks fell on Friday following a mixed jobs report. US Employers added 210,000 workers in November, less than economists expected, but the unemployment rate tumbled to 4.2%, down from 4.6% and beating estimates for a more modest dip.5 Also, the labor force participation rate in the US edged up to 61.8 percent in November of 2021 from 61.6 percent in October, the highest since March 2020.6
So how can the unemployment rate fall so much while the labor participation rate increases and only 210,000 jobs were added? It can't. The 4.6% to 4.2% change is at least 600,000 people. So it's just not possible. I suspect that the 210,000 number is wrong and will be revised upward.
Powell Surprises Markets
Markets easily digested the Fed’s early-November announcement that it would pull the trigger on its bond purchase tapering program, but were caught off-guard by Powell’s comments during Congressional testimony last Tuesday. Powell indicated that the Fed would discuss the option of accelerating its tapering plans at its next meeting.7
Powell cited the risk of higher inflation and substantial improvement in the labor market as warranting ending bond purchases a few months sooner than planned. Powell sought to move away from describing inflation as transitory, acknowledging that rising energy prices, higher rents, and strong wage gains could keep inflation elevated, though he maintained inflation would decline sometime in 2022.7
I disagree, as I mentioned in my monthly Notes Along the Path letter just days ago. I still think inflation is transitory and that energy prices will likely drop, but the markets don't listen to me, they listen to what Chairman Powell says (as they should!)
This Week: Key Economic Data
Wednesday: JOLTS (Job Openings and Labor Turnover Survey).
Thursday: Jobless Claims.
Friday: CPI (Consumer Price Index). Consumer Sentiment.
Source: Econoday, December 3, 2021
This Week: Companies Reporting Earnings
Monday: Coupa Software (COUP), MongoDB (MDB).
Tuesday: AutoZone, Inc. (AZO).
Wednesday: Gamestop Corp. (GME), UiPath, Inc. (PATH).
Thursday: lululemon athletica, inc. (LULU), Broadcom, Inc. (AVGO), Costco Wholesale Corporation (COST), Chewy (CHWY).
Source: Zacks, December 3, 2021
“Avoid having your ego so close to your position that when your position falls, your ego goes with it.”
– Colin Powell
Did you know that if you owe the Internal Revenue Service $52,000 or more, the IRS can revoke your passport? That's right, the IRS has the power to revoke the passport of any taxpayer owing $52,000 or more, including penalties and interest.
Notably, if you’re currently paying off the debt or are contesting a tax bill in court, you should not be affected. However, anyone under an IRS tax lien could find their ability to travel hampered.
If you have any questions about tax debts or other complex tax issues, contact a qualified attorney or tax specialist.
* This information is not intended to be a substitute for specific, individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
Tip adapted from IRS.gov8
Eat the Rainbow, Reap the Rainbow
Every food has its own health benefits, and colors can help you determine which health benefits you’re enjoying. Here’s a quick summary of some of the benefits associated with these colored foods:
Tip adapted from Nutrition Australia9
You sit down to play chess. Out of the 16 pieces you have at your disposal, how many of them could be used to make your first move?
Last week’s riddle: What nation has current and former capital cities whose names are anagrams of each other in the English language? (Hint: It is a major player in the global economy.) Answer: Japan (Tokyo and Kyoto).
Red-eyed tree frog (Agalychnis callidryas).
Full Market Report
Footnotes and Sources
2. The Wall Street Journal, December 3, 2021
3. The Wall Street Journal, December 3, 2021
4. The Wall Street Journal, December 1, 2021
5. Reuters.com, November 30, 2021
6. IRS.gov, May 25, 2021
7. Nutrition Australia, June 24, 2021
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The forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
The market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results.
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Weekly Market Insights: Powell Surprises; Omicron Concerns
December 07, 2021