November 2021 Market Commentary

November 2021 Market Commentary

Financial Insights

Global equity markets turned lower in November after a positive beginning. Most US benchmark indexes posted new all‐time highs on or around the 8th before beginning a slow, irregular decline that accelerated in the month’s final trading days.

International and Emerging Market issues followed roughly the same pattern, but popular indexes of non‐ US companies had not matched the domestic new highs posted during the first third of November. Persistent Covid Delta variant cases, especially in western EU countries, kept investors in a cautious mood as governments began to reinstitute the same lockdowns and mandates that had been imposed through much of 2020. Performance of key equity benchmarks for the month, QTD and YTD are below.

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Just before Thanksgiving, another variant of the Covid‐19 virus began to emerge in reports from South Africa and surrounding countries. Not a wholly unexpected development given the virus’ history, but the news delivered a shock to financial markets and governments across the globe.

Government health officials however, including the South African Health Minister who first announced the new mutation, have cautioned that immediate reactions in Europe, and the UK especially, appear to be overdone and overestimate the potential lethality of the strain.1

To date, there have been no reports of deaths associated with the new mutation but detected cases have increased exponentially in southern African countries and testing has identified infected individuals in 38 countries as of this writing, including the United States. It is likely that cases will continue to spread rapidly as initial analysis indicates that Omicron is highly contagious.2

In the US, so far, only New York’s governor has taken statewide steps, announcing early last week that all elective surgery will be postponed until further notice.3 Data detailing NY hospitalizations related to Omicron have not been released and some observers have speculated that the prohibition may be preemptive and co‐related to the loss of an estimated 34,000 healthcare professionals due to noncompliance with vaccination mandates effective in late September. 4

Equity markets plunged and bonds rose sharply on initial news of the new variant during the half‐day of trading after Thanksgiving. The succeeding two sessions through November 30, brought high levels of volatility and further net declines.

At this point, it appears that at least another 10 days or so will be required to fully evaluate the effect of the illness. Identified cases have been asymptomatic or presented symptoms typically associated with a mild to severe cold.5

In the context of currently available information, we suspect that market weakness attributable to Omicron has derived more from fear of reimposed draconian government measures than from potential lethality. But this could change from both standpoints.

The emergence of a new Covid variant is not the only factor weighing on markets.

In Congressional testimony last week and, incidentally after President Biden had tapped the Fed Chairman for a new term, Mr. Powell revealed the possibility of an accelerated timetable to end current bond and mortgage backed securities open market purchases.6

Fed watchers expect a change in the Open Market Committee’s plans at the December 15 FOMC meeting in response to persistent inflation throughout the US economy. It is possible that inflation has become economically endemic to the extent that the only remedy is higher interest rates, similar to conditions in the late 1970s.

Commodity prices, including crude oil, gasoline, and natural gas have also declined markedly, sparked by fears of renewed lockdowns in response to Omicron and a possible loss of hard fought global economic gains.

Energy costs have led inflation higher during 2021 but a strong reversal in raw material prices could afford the Fed a bit of breathing room. Crude quotes plunged on the heels of the initial Omicron news and have stabilized roughly 20% below recent peaks. Commodities have generally trended lower in concert with the past 10 days of equity declines, illustrated below by 2021 DJ Commodity Index closing prices.

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Equity markets are entering a seasonally strong period but may be kept off balance until the true nature of Omicron becomes clearer. With nearly 80% of Americans fully or partially vaccinated as of the beginning of November, 7 if the inoculations are even only partially effective against the mutation, we can expect little increase in hospitalizations and limited fatalities. New therapeutic drugs on the cusp of FDA approval are welcome complements to existing anti‐virus weapons.

In our view, as noted above, the greatest danger to equities could be reimposed government containment measures. Despite the lack of discernible mitigation effects from mask mandates and lockdowns last year, some states or cities may return to these measures. At present, both the White House and the US Surgeon General are cautioning against overreaction and one recent poll suggests most Americans are not reacting with fear.8

The larger issues for investors are the directions of interest rates, taxes, and spending. The Fed’s mandate to maintain a moderate level of inflation (2%‐3%) will eventually push its policies toward tightening money growth of and raising short term interest rates if price increases persist. Should the Omicron variant prove little more than the proverbial tempest in a teapot, inflation and interest rates will return to the forefront of markets’ concerns.

Broad US equity benchmarks had declined 8%‐10% from their all‐time highs at the November 30 lows, which, statistically, qualifies as a correction. Earnings for the fourth quarter are expected to be outstanding which, barring development of the new virus mutation into a serious threat, should allow the traditional Santa Claus rally to emerge as 2022 nears.

1 “‘I Have Been Stunned At The Response’: South African Dr. Who Reported Omicron Slams Hysteria,” www.dailywire.com, December 1, 2021. 2 “WHO: Omicron in 38 Countries, No Deaths Reported,” www.theepochtimes.com, December 3, 2021. 3 “Gov. Kathy Hochul orders halt on elective surgery amid COVID spike, Omicron,” www.nypost..com, November 26, 2021. 4 “NY COVID‐19 vaccine mandate reduced health care workforce by 3%. Here's the biggest impact,” www.lohud.com, October 14, 2021. 5 “The omicron variant may present mild COVID symptoms, expert says,” www.deseret.com, December 1, 2021. 6 “Powell Lays Groundwork for Faster End to Stimulus as Inflation Outlook Worsens,” www.wsj.com, November 30, 2021.7 “70% of US adults are fully vaccinated, 80% partially: White House,” www.thehill.com, November 1, 2021. 8“Americans Less Concerned About Omicron Outbreak Than They Were About Delta, Poll Finds,” www.newsweek.com, November 30, 2021.

This commentary is provided for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. Content has been obtained from third-party sources and is believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. The views expressed in this commentary are subject to change based on market and other conditions. The commentary may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.