Rebound — Week of November 29, 2021

As of market close November 26, 2021. Returns in percent.

Rebound

Wrapping up Consolidation November this week. Weeks two and three were sideways affairs marked by excellent earnings news and a few new highs. Last week was more of the same until Friday’s 2%+ drop. Small cap stocks took the worst of Friday’s worries and their weakness carried over into this morning’s session. 

The catalyst for Friday’s price action was the announcement of the Omicron variant. Stocks had stalled and were consolidating over the last two weeks. The S&P 500 had spent nine of the last fourteen trading days on either side of the 4,700 level. Inflation worries one day, improving supply chain stories the next, bouncing in a narrow range waiting for a trigger. A one-day stint after a holiday accentuated by an early market close meant desks were even less manned than usual. Once the computer algorithms got negative headlines from the WHO announcement, selling pressure increased. 

Fear and flight-to-safety trades usually involve U.S. Treasury bonds and gold futures. Treasury yields did pop lower early Friday but, like stocks today, are reversing higher. Gold remains an interesting outlier. It should have jumped higher on fears that the new variant would shut down economies. Instead, gold futures were little changed and sit about 5% below their recent high from the middle of the month.

Volume is a good barometer of trend changes. If fear was the order of the day, then volume should have surged and climbed in today’s session. Friday’s volume in stocks comprising the S&P 500 index totaled just over 2.67 billion shares. That is only 85% of the average volume traded this month. Over in the options pits, the VIX index, a measure of how much pit traders think the S&P 500 might move in the next 30 days, only traded half its usual volume. Light trading, solid Black Friday shopping and excellent earnings have us looking for a rebound later in the holidays.

Relief

Last Monday’s news that President Biden will renominate Powell for another term as Fed Chair gave some relief to markets. Fed Governor Lael Brainard will serve as Vice Chairman. Biden took his time in reappointing Powell, causing some angst in trading rooms. Markets like certainty, and Powell is viewed as a steady hand. 

By taking several months to announce the reappointment, President Biden may have signaled that he does not have much confidence in Powell. We hope that is not the case. While we have our policy disagreements with the Fed, Powell is a good communicator and is well regarded on both sides of the political spectrum. Biden still has three Fed Governor seats to fill, possibly shifting monetary policy philosophy in a new direction. 

Return

December is fast upon us, and a new month means jobs Friday. November’s Non-Farm Payroll report should show a net gain in jobs around 500,000. The unemployment rate should dip by 0.1% to 4.5%. We were with the consensus earlier in the year, believing the idea that once stimulus programs ended, waves of workers would return. However, in the key 25 to 54 age group, employment has held relatively constant since July. Workers above and below those ages are driving the changes. 

We have mentioned in the past our concern about the number of unemployed workers. The BLS estimates that 7.6 million are unemployed. We would suggest that number is high. Quit rates are at an all-time high, at least 1 million Boomers have retired over the last year and at least 1 million more workers likely do not have the skills to transition to another industry. Let’s call it 5.6 million unemployed for some quick figuring. The lowest level of unemployed was 5.717 million in February 2020. Perhaps the unemployment level can fall further, but we think we are close to the “new” low. If so, the Fed needs to consider accelerating its tapering program. 

Average hourly earnings should show increases of over 4% year-over-year. A nice increase, but not enough to keep pace with recent inflation. Factory orders, pending home sales, ISM manufacturing and consumer sentiment over the last two months should all show a return to “pre-delta” strength.

Wrap-Up

A 2% decline should not be cause for concern. Yes, it was the largest drop for the year in certain stock indices. The magnitude of the excitement does not match the strength of the economy and company earnings. We would like to think governments have learned to be cautious but wait for test results. Early returns on Omicron suggest much faster replication but milder disease cases. 

Our process rests on getting the intermediate and longer trend moves in the market correct. Perhaps the world will be fortunate, and this latest variant will burn out quickly as so many of the others have. Patience is key, and the primary trend remains higher. 

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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