Santa Claus Rally Despite Inflation & Omicron

Major stock market indexes opened modestly higher, looking for direction after fully recovering from last week’s mini-correction. At the moment, the Dow is up 70 points and the S&P 500 is up .5%. Weirdly, both consumer staples and technology are leading  the way with gains over 1%. The energy sector is giving up some ground after a monster rally. Small-caps and foreign stocks are also leading to the downside. The market is grappling with Covid Omicron, which scientists are struggling to understand. But other forces—inflation, economic growth, Federal Reserve policy—are probably more important.

A new study out of Kyoto University claims Omicron is 4.2 times more transmissible than the Delta variant, and also “escapes immunity built naturally and through vaccines more.” Thankfully, so far it seems like Omicron infections are far less severe. South Africa’s population is largely unvaccinated and while Omicron is spreading quickly, hospitals aren’t yet overwhelmed. I’ll point out that the Kyoto study hasn’t yet been peer-reviewed and Omicron is so new that results cannot even remotely be characterized as thorough or conclusive. As with the other variants, headline risk is high and we’ll suffer through a lot of noise before coming to a more or less clear understanding of Omicron. From an investment point of view, Omicron is probably a lesser threat compared with Delta, but of course the new variant could temporarily impact global economic growth.  

According to the Consumer Price Index, inflation climbed to a roughly 40-year high in November. The rate of price growth topped 6.8% from year-ago levels. By this measure, inflation has been higher than 5% for six consecutive months, whereas the long-run average is something closer to 3%. A big part of this year’s spike can be blamed on oil prices, which I maintain are needlessly volatile and still vulnerable to manipulation by geopolitics and OPEC. Stripping out food and energy, so-called “Core CPI” is rising at a more palatable 4.9% (thought still a 30-year high). Bulls blame elevated inflation on  1) post-Covid supply chain disruptions, which are temporary, and 2) a booming economy. They also point out that consumers are in great financial shape so businesses are able to pass along higher costs to them. That doesn’t sound so bad. Bears, however, also place blame on massive government stimulus and say higher inflation is now entrenched (i.e. semi-permanent). That means the Fed will have to get serious about controlling inflation with interest rate hikes, which is typically a headwind for the stock market. This, then, is the economic tug-of-war to be played out in capital markets over the next six months.     

The Wall Street Journal says California’s port congestion problem “isn’t letting up” yet. One can only see about 30 ships waiting outside LA  and Long Beach, but many others are in a holding pattern farther out to sea. So in reality, the number of ships isn’t falling. During the first nine months of this year the volume of shipping containers received by these ports jumped more than 20% from pre-Covid levels. Of course, this speaks to a booming economy, but also to a shortage of truckers and dock workers.