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Key Points for the Week
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.
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.
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.
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.
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:
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.
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
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Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold, or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future.
Any expression of opinion is as of this date and is subject to change without notice. Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. Diversification and asset allocation do not ensure a profit or guarantee against loss. There is no assurance that any investment strategy will be successful.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as "The Dow" is an index used to measure the daily stock price movements of 30 large, publicly owned U.S. companies. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007, the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
The Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented.
Please note, direct investment in any index is not possible. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
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