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Good Growth — Week of December 6, 2021

Written by Steve Orr, Chief Investment Officer, and Greg Kalb, Investment Advisor

index wtd ytd 1-year 3-year 5-year index level
S&P 500 Index -1.18 22.43 25.48 19.67 17.80 4,538.43
Dow Jones Industrial Average -0.76 15.05 17.92 12.66 15.06 34,580.08
Russell 2000 Small Cap -3.83 10.27 18.61 13.11 11.84 2,159.31
NASDAQ Composite -2.60 17.79 23.00 27.73 24.71 15,085.47
MSCI Europe, Australasia & Far East -0.59 7.34 10.90 10.24 9.97 2,242.99
MSCI Emerging Markets 1.14 -2.27 3.05 9.54 10.56 1,236.19
Barclays U.S. Aggregate Bond Index 0.14 -1.34 -0.77 5.43 3.65 2,359.92
Merrill Lynch Intermediate Municipal 0.15 0.84 1.36 4.63 4.01 319.79

As of market close December 3, 2021. Returns in percent.

Good Growth

December risk is supposed to center on your shopping list. Last week’s performance by Fed Chairman Powell reminded us of December 2018 when his interest rate comments gave stocks the -9% “Powell Punch.” During Congressional hearings, Powell acknowledged that inflation is going to persist longer than expected and that the Committee may change its bond buying program. 

Friday’s jobs report had a lousy headline, but the details were “not-bad-to-good.” Market action was less a reaction to the headline than traders continuing to play a rocky week. And last week was a good reminder as to how quickly headlines can spook investor sentiment. Most “fear” gauges were well into optimistic and bullish territory in mid-November. As of this morning all but one of the sentiment indicators we monitor are solidly in Bearish territory. Here’s a list of the headlines moving sentiment: 

  1. Omicron variant identified
  2. Omicron case in U.S.
  3. White House says U.S. prepared to act if Russia invades Ukraine
  4. OPEC prepared to slow production if demand suffers
  5. Powell says inflation not transitory
  6. Yellen says government runs out of money by December 15th

Omicron Ouch

The six trading days since the announcement of the omicron outbreak in South Africa have seen the S&P 500 drop about 3.4%. The delta announcement sent the index down 2.8% in mid-July. Once the delta variant hit U.S. shores, the S&P 500 correctly forecasted a weak third quarter with a six week, 5.2% drop. We are nearing the two-year mark for COVID-19 and its variants. Most prior pandemics had recurring waves of mutations and each wave was usually shorter in duration. 

Hopefully omicron’s travel through the global population happens faster and with less sickness. The percentage of vaccinations and efficacy of existing treatments will play a role in the wave’s duration. As of Friday, the CDC reported the variant has been identified in 40 countries. The virus is once again the throttle on the economy’s activity level. 

We are certainly not scientists and would not hazard a guess on omicron’s severity. From an investment perspective, however, we can lay out possible scenarios and impacts on our portfolios. We do know that the delta drags cut third quarter GDP by at least half of what was expected. Employment growth, manufacturing and housing growth all slowed. 

Monetary policy would provide little support in a slowdown. The Fed and other central banks are committed to pulling back 2020 stimulus efforts. At best these efforts to slow their bond buying (“QE taper”) could be halted temporarily. They are still at their lower bound or zero level of interest rates, so those tools are not available. Supply-chain inflation is an ongoing problem that is turning political. On the fiscal policy front, Congress is having trouble advancing another spending bill. 

A protracted slowdown lasting into the first quarter would begin to affect stock earnings. Port and shipping snags would renew cost pressures on supplies, adding to inflation pressures. Lower earnings and persistent inflation would move our indicator scores toward long-term neutral levels. 

Not So

Market headlines touted November’s payroll report as “a big miss.” Estimates centered around 550,000 new jobs in the mid-November survey but came in at 210,000. We would argue not so fast and not so bad. Let’s start with the BLS estimate of unemployed workers. November’s report showed a drop of 542,000 to 6.9 million. This series has declined eighteen months straight since April of last year. The pre-pandemic low was 5.7 million last February. The BLS estimate of 1.6 million persons who are “available for work and looked for a job” are the folks most likely to be in the new job gains in the coming months. Taking away another 1 million from the workforce due to early retirements, child and elder care leaves barely 6 million “available” and very close to February 2020’s 5.7 million. 

The household survey tells a bit different story. The number of employed civilians in the household data increased by just over 1 million. The non-farm payroll survey talks to businesses, the household interviews folks at home. As a side note the ADP monthly payroll report showed private companies added 534,000 new jobs. The actual number may lie somewhere between a half and one million. We would look for more revisions to the non-farm payroll number in the next couple of months. 

We are encouraged that the labor force participation rate finally rose. At 61.8% of the population, it is still well below the 63% area that prevailed over the last decade. Given the falling number of unemployed and those looking for work, we wonder how much lower the household unemployment rate of 4.2% can fall. The pre-pandemic low of 3.5% is not that far away. A lower supply of labor should force wages higher. Average hourly earnings grew 4.8% year-over-year. 

The Fed must be aware of wage pressures and the shrinking labor pool. Those concerns were likely driving Chairman Powell’s comments to Congress regarding a faster drawdown of the Fed’s bond buying program. If inflation continues to run above 4% and job growth keeps chipping away towards 3% unemployment, the Fed’s goals will be met for raising rates before it has completed its bond purchase program. Officials have been adamant that they want to end the bond buying program and get a handle on dollar liquidity, before raising interest rates. The Fed meets again December 14-15 and that is probably too soon given the virus variant. The Fed will have one more round of job reports and two inflation reports (CPI this Friday estimates at 6.7% and January 12th) to consider. 

Real World

Lost in the virus and job news were early returns from November’s Purchasing Manager surveys. These are surveys of manufacturers and service industries. Questions cover hiring, new orders, activity and prices paid. There are two global competitors, ISM and IHS Markit. Both firms showed global activity increased last month. U.S. readings were quite strong, returning to last summer’s pre-delta levels. Durable goods and factory orders, key measures of future manufacturing activity, stayed at levels suggesting a very strong quarter. 

Wrap-Up

Oversold on omicron. The swift six-day sell-off has washed out investor optimism and reset many technical indicators to neutral or oversold conditions. We are told it will take several weeks for scientists to get a handle on omicron and several months if vaccine adjustments are necessary. 

The fundamental backdrop remains solid, if not improving. New orders are running above trend, inventories are low, supply chains are on the mend. Earnings estimates continue to move higher. Year-end fund flows to pension plans and rebalancing suggest the rally restarts on any good news from the variant. 


Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary's University School of Law. Follow him on Twitter here. Greg Kalb is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts from The University of Texas at Austin.

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