November started strong as earnings season concluded with robust growth and 75% of S&P 500 companies reporting a positive revenue surprise. But after hitting all-time highs, equity markets abruptly turned in the last week of November. News of the Covid-19 Omicron variant triggered a selloff, leading to the largest decline in the S&P 500 since March.
The S&P 500 closed down 0.83% for the month, while the tech heavy Nasdaq Index managed to eke out a gain of 0.25%.
News of Covid variants are starting to sound like announcements of Groundhog Day. In November, scientists in South Africa sounded the alarm on the Omicron variant, which was labeled a variant of concern by the World Health Organization on November 26, as it appears to have the potential to change the path of the pandemic.
Omicron is feared to be more contagious than the Delta variant and more vaccine resistant due to its nearly 50 mutations. At the same time, there have been reports of it being relatively mild and still affecting mostly unvaccinated populations. Overall, it’s too early to draw substantial conclusions about Omicron. We still do not know how effective current vaccines are. The BioNTech chief executive has indicated that their vaccine continues to provide strong protection, while Moderna’s C.E.O. has been more pessimistic. Both companies believe that a new vaccine or booster shot to combat Omicron, if needed, can be ready in a matter of months.
Regardless of what is concluded about the variant itself, the immediate economic impact of its discovery cannot be ignored.
Countries moved swiftly in response to Omicron, with the U.S. restricting travel for non-citizens from several Southern African countries. Globally, countries like Japan and Israel are banning foreign travelers, while Austria has extended a national lockdown and instituted a vaccine mandate.
There are concerns that the variant could put additional pressures on the global supply chain—the Delta variant earlier this year had a direct impact on computer chip and other factories in Asia—just as they begin to open up again. Markets, of course, also reacted, with the worst two-day selloff in the S&P 500 since October 2020.
The market turmoil was exacerbated by concerns about inflation and comments from Federal Reserve Chair Jerome Powell. Fresh off his re-appointment of a second term, Chair Powell told Congress that it’s probably time to retire the word “transitory” when describing inflation. He also made clear that the Fed will be considering an acceleration in tapering off its monthly bond purchases in response to rising inflation.
These comments were not made in isolation, as several Fed officials had been signaling the possibility of earlier rate hikes, given ongoing inflation drivers from supply chain bottlenecks and labor shortages. Inflation readings in the month remained at a three-decade high; in October, the U.S. Consumer Price Index (CPI) rose 6.2% from the previous year.
At first glance, headline holiday sales seemed to disappoint on Black Friday and Cyber Monday. Consumers chose to stay home on Black Friday, with total sales dropping from last year’s mid-pandemic numbers and physical traffic down 28% from 2019 numbers. Cyber Monday was unable to pick up the slack, with spending decreasing for the first time ever.
The culprit? Strong awareness of supply chain challenges and product scarcity had shifted spending earlier. Black Friday deals were hitting stores in October and Americans took notice. Looking at the season from the beginning of November, consumers spent $109.8 billion online, nearly 12% more than last year.
The National Retail Federation still projects that this year we’ll see the highest holiday sales ever, given record household wealth. Some retailers remain better positioned to benefit than others—for example, Amazon recognized record post-Thanksgiving sales, capturing almost 18% of all Black Friday dollars spent, the most of any retailer.
The Omicron variant scare is not the first, and it will certainly not be the last. As we watch the situation unfold and wait for clarity on Fed policy, we can likely expect choppy markets heading into the New Year. The coming weeks will provide more insight into what might come next as we transition into 2022.
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