Hovering Near All-Time Highs Ahead of FOMC, Omicron replacing other strains?


Last week was a good week in the S&P 500 as investors shrugged off a higher-than expected inflation reading. The markets were led by the Dow last week, which leans more cyclical, as it gained 4%, breaking a four-week losing streak. The S&P 500 and the Nasdaq Composite each rose 3.8% and 3.6%, respectively.  Similar tailwinds propelled non-US equities, with the STOXX 600 and FTSE 100 increasing by 2.76% and 2.38%, respectively.

The volatility spike due to a combination of Federal Reserve worries and the new Omicron versus strain took less than 2 weeks to subside.

Headline inflation data came in at 6.8% in November year-over-year for the biggest jump since 1982. The print was marginally higher than the 6.7% Dow Jones estimate.

FOMC Meeting This Week

The Federal Reserve meets this Tuesday and Wednesday.  Expectations are that the Fed will announce a faster tapering process. Bond markets have priced in 3 rate hikes at this point, which points to a more aggressive tapering from the Fed being largely priced in. JP Morgan strategists note that tightening could begin in June of 2022.

Omicron Variant in South Africa

News and data continues to come in on the Omicron variant, and on the balance, it continues to be positive. Despite a surge in daily cases in the Omicron epi-center of South Africa, hospital admissions remain stable. ICE usage in the country is collapsing as is the use of ventilators.

The Omicron variant seems to have “pushed out” other strains of the virus. In South Africa, the Omicron variant has completely replaced all other strains. If Omicron successfully “replaces” other strains, and the Omicron variant itself is mild, this suggests that the Omicron variant could be in the process of turning COVID-19 into a milder disease. Data will continue to come in and things remain in a constant state of flux regarding the virus flux, but this is a mildly encouraging development.

Bullish Factors into Year End

With all of this in mind, the S&P 500 continues to trade near all-time highs. This is in-spite of two 5% pullbacks in the last several months. “Santa Clause” (positive seasonality) could still be coming to town, a high amount of cash is waiting on the sidelines, the fed hikes have been priced into the bond market, excessive negative sentiment is a classic contrarian indicator for a rally, and market leadership continues to favor cyclical groups that do well in bull markets. All continues to point to a market that is more interested in going further up, than down.

With that said, we do expect the short-term stock market volatility to continue this week as the Fed news, in combination with it being option expiration week, should make for a choppy and noisy week.

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