Omicron COVID-19 Variant and Inflation Concerns Lead to Volatile Month
At the end of November, the S&P 500 ran into turbulence caused by the onset of the Omicron COVID-19 variant and concerns surrounding persistently high inflation. Although the index had risen 2.4% in the weeks leading up to Thanksgiving, the late selloff brought the monthly return to -0.7%.
On the day after Thanksgiving, investors awoke to news of the new Omicron variant. This quickly sparked a rotation out of sectors that benefit from an economic reopening into sectors that benefit from stay-at-home directives. While there are still many unknowns regarding the Omicron variant’s severity and transmissibility along with the current vaccine efficacy against this new variant, investors were quick to move first and ask questions later.
What Worked and What Didn't Work
Economically sensitive sectors including Energy, Financials and Industrials were among November’s worst performers, dropping between 3.5% and 5.7% for the month. Similarly, commodities like oil (WTI Crude) and natural gas (Henry Hub) each fell close to 20%. Conversely, as has consistently been the case when COVID-19 concerns are heightened, Technology was the biggest beneficiary of the sector rotation. Core portfolio holdings including Apple and Microsoft performed well during November, as their strong balance sheets and remote-working product and service offerings were attractive to investors. The Technology sector ended the month up 4.4%.
What We're Watching
Over the next few months, the market will be digesting a significant amount of macroeconomic news. The recently passed U.S. Infrastructure bill and the proposed scaled-down U.S. spending bill should provide additional funding into an already strong economy. However, the key factors through the end of 2021 and the beginning of 2022 are likely to remain the Omicron variant and the Federal Reserve’s reaction to inflation. While various healthcare news outlets, including Stat News, have begun to express optimism about the variant, negative headlines may still cause volatility.
At roughly the same time as news of the Omicron variant surfaced, Federal Reserve Chairman Jerome Powell announced his displeasure with current inflation levels. In the coming months, investors will closely monitor factors including supply chains, inventories and commodity prices that have contributed to a 4% annualized inflation rate over the last half of 2021 (CPI ex-food/energy, U.S. Bureau of Labor Statistics). Many inflation inputs including oil and natural gas have recently begun to moderate, and further weakening would be welcomed by investors.Please do not hesitate to reach out with any end-of-year planning issues or questions. We wish you and your family a very happy and healthy holiday season!