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Key Points for the Week

  • New cases of the Omicron variant are being discovered. This created concerns about renewed social distancing and lock downs which pushed markets lower on Friday.
  • Core inflation rose 0.4% last month and has climbed 4.1% in the last year, according to the Federal Reserve’s preferred measure of inflation.
  • The number of cargo ships waiting to unload at Southern California’s main port has dropped by 45% in the last two weeks, indicating shipping challenges are continuing to improve.

Coronavirus cases have been on the rise in Europe, climbing from about 700,000 new cases a week in September to 2.6 million a week in November, reported Richard Pérez-Peña and Jason Horowitz of the New York Times. As Thanksgiving approached, there was concern that travel and togetherness could increase the number of cases in the United States, too, creating stress on already taxed healthcare systems. Jamie Smyth and Caitlin Gilbert of the Financial Times explained:

…what was expected to be a celebration has become fraught with danger in some Midwestern states, where vaccination rates are low and COVID-19 cases are rising rapidly after a summer lull…Nationally, cases have increased by nearly 30 percent since the beginning of the month…

Caitlin Gilbert, Financial Times

Financial markets took the fall surge in stride. They were less sanguine when news broke last week that a new variant of coronavirus, called “Omicron,” had been identified in South Africa and was spreading.

Little is currently known about Omicron. In Nature, Ewan Callaway reported the variant has a significant number of mutations, which is concerning. Scientists are tracking Omicron’s spread and working to “understand the variant’s properties, such as whether it can evade immune responses triggered by vaccines and whether it causes more or less severe disease than other variants do.”

We have much to learn about the Omicron variant. In general, when a virus mutates it becomes more transmissible and less deadly. The early data indicates that the first part of this general trend is true, Omicron is more contagious.

Global stock indices and oil prices dropped sharply on Friday, which was a holiday-shortened trading day, reported Chris Prentice and Carolyn Cohn of Reuters. U.S. Treasury bonds rallied as bond prices were pushed higher by investors seeking lower-risk opportunities. FactSet reported:

[The Standard & Poor’s 500 Index] logged its worst day since late February and all major indices finished the week in negative territory. All sectors ended lower with moves highly influenced by today's [COVID-19] variant concerns…Healthcare held up best...


The stock market volatility has carried over into this week. Although not as headline grabbing, market anxiety included the tapering of bond purchases by the Federal Reserve, inflation, the pending debt ceiling extension, and the Build Back Better legislation.

This Week in the Markets

Concerns about the Omicron variant raised the risk of additional lockdowns and contributed to a decline of more than 2% in the S&P 500 on the day after Thanksgiving. The COVID-19 variant, first detected in South Africa, triggered travel restrictions in the U.S. and Europe.

Other data points provided a mixed picture. Energy and automobile prices shot higher and contributed to inflation increasing 0.6% based on the personal consumption expenditures (PCE) price deflator. Large price jumps for gasoline and automobiles contributed to the increase. Stripping out the volatile food and energy components lower the increase to 0.4% in October and 4.1% during the last year.

Supply chain challenges, which have contributed to higher inflation, seem to be improving. The number of cargo ships waiting to unload at either Los Angeles or Long Beach harbors dropped from 111 to 61 in the last two weeks. Supply chain issues have slowed housing construction. Construction has yet to be started on approximately 36% of the new homes that have been purchased.

The S&P 500 index and MSCI ACWI both declined last week. The Bloomberg U.S. Aggregate Bond Index also dropped. The October employment report and news about the Omicron variant will be at the top of our list to monitor this week.

Risk #1 is Back

At the beginning of each quarter, we identify five big risks to watch. Virus variants continue to be the top risk. Unfortunately, it looks like Risk #1 is about to reassert itself. The Omicron variant was discovered in South Africa, and other cases have popped up in other parts of Africa and Europe. Some experts believe the variant may have developed elsewhere in Africa and then transferred to South Africa. Other experts feel that the virus may have started in Europe. Where it started is less important than how far it might spread.

Our concern has always been a more contagious variant that renders vaccines less effective could push economies back into lockdown. It is not yet known whether Omicron causes more severe illness or is vaccine resistant, but medical experts are concerned the high number of mutations compared to previous variants will cause it spread even more rapidly than Delta.

Even if the Omicron variant spreads rapidly, the economic and market impact is unlikely to be as severe as the first COVID wave. Countries and companies have proven an ability to adjust to lockdowns and find ways to maximize output while reducing spread and interaction. The U.S. and many European countries banned travel from South Africa and some other African countries to help contain the variant.

The resurgence of virus risk comes as other top risks were also making news. The presidents of China (Risk #2) and the U.S. held a call to smooth out differences. Early signs indicated supply chain difficulties (Risk #4) may be easing. The number of containers left at the docks in Long Beach and Los Angeles, which account for about 40% of freight entering the U.S., decreased by 33% in the last two weeks.

Hiring also continues to improve. U.S. first-time jobless claims fell to their lowest level in 52 years, dropping to 199,000 for the first time since 1969. Initial claims have been steadily decreasing since an uptick in September when fears of the Delta variant peaked. Initial claims have now dropped below the 2019 average of 218,000. This data is further evidence that the U.S. labor market is continuing to recover from policy decisions (Risk #3) that helped push some people out of the workforce.

The emergence of a new variant and the good news on the supply chain and jobs reinforce our view that we should remain risk-aware but optimistic. In many ways, investor behavior (Risk #5) is the risk we control the most and analyze the least. Just because the S&P 500 hadn’t dropped more than 1% since early October didn’t mean it couldn’t at any time. Don’t be surprised if markets get more volatile as they quickly adjust in price to reflect new information. Likewise, look for supposedly intractable problems to potentially be solved by the steady effort and innovation of capitalist economies.

Wear a Shoe, Plant a Tree

In 1987, the United Nations Brundtland Commission offered a definition for sustainability: Meeting the needs of the present without compromising the ability of future generations to meet their own needs. Today, innovators are developing goods that enhance our lives and the world around us. Here are a few projects that may intrigue shoe enthusiasts:

Apple tree kicks. A Canadian fashion designer has developed biodegradable kicks that have fertilizer and apple seeds in the heels. When the shoe wears out, the owner can bury it and grow a tree. “The materials which the shoe is made from contain naturally-occurring compounds which attract microorganisms to feed on and break down the shoe over three years. Even if you don’t get around to burying them, they will still biodegrade if thrown in a landfill,” reported Andy Corbley of the Good News Network.

Garbage patch sneaks. You may have heard of the Great Pacific Garbage Patch. It’s a spinning vortex of plastic waste and other marine debris that is “…comprised of the Western Garbage Patch, located near Japan, and the Eastern Garbage Patch, located between the U.S. states of Hawaii and California,” reported National Geographic. A global sneaker company is recycling plastic ocean debris into polyester yarn that is woven into material for shoes, reported Clancy Morgan of Business Insider.

Vegan trainers. A German multinational is working with a biotech start-up to make biological leather from mycelium – the part of fungi that produces mushrooms, according to the Good News Network. The material is a substitute for real leather in athletic shoes. Other companies make vegan leather from pineapple leaves, cork, apple peels, and other materials, reported Harper’s Bazaar.

When evaluating sustainable fashion, beware of green washing – claims that a company’s products are environmentally friendly when they’re not. As with so many things, it is important to do your own research.

Build Back Better Act (BBBA) Tax Changes

The US House of Representatives passed the Build Back Better Act (BBBA) last week. The Bill now moves to the Senate, which is expected to make changes to the Bill. However, we have received inquiries as to what tax changes the Bill proposes:

  • Surtax on multi-millionaires: A new tax 5% when Adjusted Gross income is above $10,000,000. The surtax rises to 8% when Adjusted Gross Income is above $25,000,000. Please note that this is a tax on income as opposed to a tax based upon taxable income.
  • Expanding income subject to the ACA tax: The current tax law includes a 3.8% ACA tax on earned income and investment income. The mechanics for calculating this tax are different but there are certain types of income not subject to this tax. The list of excluded income will be reduced subjecting more income to this tax. For example, this tax will now affect business owners that are taxed as S-Corporations.
  • Corporate minimum tax: Companies have multiple acceptable methods of reporting income. Many public companies use one set of accounting standards to determine “book income” which tends to present the highest possible income and a different set of standards to report “taxable income”, which tends to report the lowest possible income. The difference is usually related to the timing of recognizing income and expenses. Th bill creates a new tax of 15% on “book income”.
  • Stock Buybacks: The Bill will now impose a 1% transaction tax on the value of any stock repurchased by publicly traded U.S Corporations.
  • Increase in the SALT limit: State and Local Income taxes are deductible as an itemized deduction. Under current law, this deduction is capped at $10,000. This cap would be raised to $80,000.
  • Limits on IRA and Roth IRA contributions: Taxpayers whose IRA and other retirement account values exceed $10,000, 000, would not be allowed to contribute to either an IRA or Roth IRA.
  • Pension Plan reporting: Pension plan administrators would now need to report to IRS the names and taxpayer identification numbers of any plan participant that has $2,500,000 or more in the plan.
  • A new IRA RMD: Currently taxpayers age 72 or older must tax a Required Minimum Distribution from their traditional IRA and some other retirement plans. This bill adds a new category of taxpayers that would be subject to required distributions and a new calculation for those taxpayers. If the year end value of the IRA and other defined contribution plans exceed $10,000,000 then the following year’s required distribution would be 50% by which this value exceeds $10,000,000. If the value of these accounts exceeds $20,000,000 then the Required Distribution would need to come from the Roth IRA first.
  • Renewable Credits: New and expanded credits for Electric Vehicles and hybrids.
  • Foreign Tax Credit: New formulas for calculating and changing the credit from an aggregate to a per country credit. This would lower the potential credit by not allowing high tax countries to be offset by low tax countries.

Did you Know? This Week in History

December 2, 2001: Enron files for Chapter 11 Bankruptcy:

On December 2, 2001, Enron filed for Chapter 11 bankruptcy, sparking one of the largest corporate scandals in U.S. history. Enron had started as a small energy company in Houston Texas, and was formed in 1985 after the merger of two gas companies, Internorth and Houston Natural Gas.

The company grew and branched into services and trading, and had rose as high as number seven on Fortune magazine’s list of the top 500 companies in 2000. Over the next year, however, Enron’s stock price began a dramatic slide, dropping from $90.75 in August 2000 to $0.26 by closing on November 30, 2001.

By the end of the year, Enron’s collapse had cost investor’s billions of dollars, wiped out about 5,600 jobs, and liquidated almost $2.1 billion in pension plans.

Over the next several years, the name “Enron” became synonymous with large-scale corporate fraud and corruption, as an investigation by the Securities and Exchange Commission and the U.S. Justice Department revealed that Enron had inflated its earnings by hiding debts and losses in subsidiary partnerships.

Weekly Focus

If you don’t know where you’re going, you might end up someplace else.

Yogi Berra, Professional Baseball Catcher

Wealth is like seawater; the more we have, the thirstier we become, and the same is true of fame.

Arthur Schopenhauer, German Philosopher