Hope all is well with you and Happy Hanukkah to those who are celebrating. Stocks continued their volatile path this week. Fears related to the Omicron variant and tightening U.S. monetary policy weighed on stocks for the second week in a row, and the major U.S. indexes fell around 1% to nearly 3%, with the NASDAQ faring the worst. Over the past two weeks, the S&P 500 has fallen 3.4%. This coming Tuesday is the 80th anniversary of the attack on Pearl Harbor, I have broken down this week’s news using quotes from the heroes of WWII
No man can tame a tiger into a kitten by stroking it.— Franklin D. Roosevelt
On the fiscal policy front, inflation is continuing to rage. The Federal Reserve is preparing to take more aggressive actions to slow it. U.S. Federal Reserve Chair Jerome Powell indicated in testimony on Tuesday that the central bank was growing more concerned about persistent inflation. Powell suggested that the Fed could try to contain inflation by accelerating its plan to taper down its bond-buying stimulus program. On the foreign policy front, China continues to provoke. US Secretary of Defense Lloyd Austin addressed recent Chinese military advancements Saturday, including the test of hypersonic weapon systems and strengthening of nuclear capabilities, saying, “America isn’t a country that fears competition.” Austin joined other top leaders in the defense industry to express the importance of strengthening ties between the US and allied nations, sounding the alarm on the threat China and Russia pose, as both nations continue to build up aggressive defenses not seen since World War II.
We are not retreating - we are advancing in another direction.— General MacArthur
Politicians are trying to move forward in a new direction. The U.S. Senate on Thursday approved a bill to fund the government through mid-February 2022, averting the risk of a shutdown after overcoming a bid to delay the vote in protest of vaccine mandates. However, Congress still faces another financial hurdle, as the government may lack funding to meet its debt obligations in coming weeks unless lawmakers agree to lift the debt ceiling.
Success is never final. Failure is never fatal. Courage is the only thing.— Winston Churchill
Covid continues to test our resolve. The spread of the Omicron variant and its economic impact remained a focus for many investors. Since the omicron-variant discovery was first announced, there has been a lot of headline noise around its transmissibility, severity, and ability to escape the vaccines. As a long-term investor it is necessary to cut through the noise and look at the potential impact. The economy and corporate earnings are growing robustly. Shutdowns would impact that growth but seem unlikely apart from a handful of travel restrictions. Health officials have also suggested that vaccines are still expected to provide some protection, particularly when it comes to the severe illness and hospitalizations that caused last year’s shutdowns.
This is NOT a time to sell and might be a time to buy. The uncertainty has stocks oscillating between gains and losses, with the S&P 500 moving more than 1% in both directions in each of the last six trading days. Medical professionals have noted that it will probably take a couple of weeks to determine the full impact of the omicron variant. Volatility is likely to stay elevated, don’t get scared. Don’t lose sight of the fact that the economy is growing. Historically, outside of recessions, similar spikes in volatility have been short-lived and resulted in above-average three-month forward equity returns. It is critical to resist the temptation to abandon long-term strategies based on near-term uncertainties.
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