November Market Recap: Omicron Fears Drive Volatility

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Concerns surrounding the Omicron variant and the possibility of rising interest rates drove global equities lower in November.

The market reaction to Omicron center around early evidence that this variant may spread more quickly and/or be more resistant to existing vaccines. At this point there is not enough evidence to know if it will lead to enhanced economic shutdowns or reduced mobility. It is worth noting that the Delta variant was significant in terms of case counts and economic restrictions, yet stocks overall continued to march higher while it spread. Unless there is new and very bad news about Omicron or another variant, we don’t believe COVID-19 is likely to be what ends the current bull market.

On the last day of the month, Fed Chairman Powell indicated asset purchases may wind down sooner than expected unless Omicron has significant impact. He also said we should not consider inflation transitory, though the Fed still expects inflation rates to drop over the next year. All of this is notable because the Fed has almost uniformly surprised to the dovish side for pretty much the last 10 years, so this could mark a major pivot. One implication is rates could begin to rise sooner and faster. This would be somewhat bearish in general, but does not prevent stocks from moving higher, especially those with significant earnings and moderate valuations. The Fed usually raises rates because the economy is strong, and now is not different. Historically, stocks usually fare well for a while after rates start to rise, with more mixed results starting a year or so later.

Trend Stocks See Decline

November was an especially difficult month for many of the trendiest stocks from earlier in the year. The ARK Innovation ETF, which had been attracting huge inflows in the first quarter, fell 18% in November and finished the month down 33% from its high in February. This leaves mega-cap Tech as the only notable market segment still favored by momentum investors. The seven largest stocks now account for over 20% of the US market. When momentum shifts do occur, it is often the biggest and most stable that are last to succumb, and we believe the relative prospects of a diversified approach within stocks is particularly favorable over the coming 12-18 months.