We saw broad-based volatility in financial markets last week. Two things were behind this uncertainty: (i) the new COVID variant, Omicron, and (ii) an updated tapering timeline from the Federal Reserve (Fed). In short, we see this market volatility as an overreaction and distraction from what is a positive state of play for the global economy.
Omicron is a new COVID variant discovered in South Africa. Its transmissibility and severity remain unknown. Looking through the panic-induced headlines, anecdotal evidence so far actually seems to indicate this virus strain may show milder symptoms and existing treatments are likely to be effective.
We are living through the biggest immunisation drive in history. Ever since COVID first emerged, scientists have broken records with respect to the time it takes to get treatments to market. They have created whole new types of vaccines and, as a result, millions of lives have been saved. As the vaccine rollout continues and new treatments are created, the return to normal (albeit a bumpy road) will continue through year-end and into 2022.
Throughout the pandemic, the Federal Reserve has been flooding the US economy with liquidity. This can’t go on forever and the Fed has now signalled a wind-down of this economic support. The recent announcement from Chairman Jerome Powell suggests the Fed will tighten faster than previously expected. Less monetary support means less market liquidity, and this has (in part) driven the recent market volatility. It’s important, in our view, not to be distracted by the short-termism of markets when they react negatively to news like this. The real story is that the Fed is tightening because it thinks the US economy is strong.
Initial jobless claims last week came in at the lowest level since 1969 and much better than expected. A slew of other data points show strong improvements in consumer confidence and outlook, household spending is up, GDP growth data for 2021 has been revised higher, and home sales are up.
Market participants risk missing the forest for the trees: yes, a new virus strain and less economic support from the Fed are issues to be cognizant of, but neither are sufficient to justify panic. The world’s largest economy is recovering much faster than expected, corporate profit growth is very strong, and this is good for stocks in the medium-term.
Look through the noise. The bigger picture is increasingly positive.
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