Stock Market Today: December 2, 2021
William G. Ferguson | 12/2/2021
Before The Bell – The emergence of a new form of the coronavirus has raised fears on Wall Street, and the uncertainty of how much negative impact it may have on the global economic recovery has fueled the recent spike in volatility. The CBOE Volatility Index (or VIX), also known as ‘’fear gauge,’’ sits just below 30, which suggests that the market has declined or “sold off” based on fear more than the fundamentals of earnings and economic prospects really justify.
The first reported case of the Omicron variant of the virus in the United States unnerved investors yesterday afternoon, with the direction of trading sharply reversing course and wiping out a session-high gain of 521 points for the Dow Jones Industrial Average in a matter of minutes. The index of thirty bellwether companies finished 462 points in the red, meaning there was a swing of nearly 1,000 points from the session’s high until the close. The same pattern played out for the NASDAQ Composite, the broader S&P 500 Index, and the small-cap Russell 2000, which after nicely higher starts to the session, ended the bearish day with respective declines of 1.8%, 1.2%, and 2.3%.
As these indexes of different types of stocks have all fallen, there has been nowhere to hide in the equity market, outside some of the highly defensive sectors, like utilities, during the last few trading sessions. Both the economically sensitive or “cyclical” stocks and the high-growth technology names have felt the wrath of the recent selling. Investor sentiment was affected, in addition to the renewed worries about the resurgence of the coronavirus, by Federal Reserve Chairman Jerome Powell’s commentary before Congress this week, in which he walked back the central bank’s previous stance that inflation will prove transitory in nature. Chairman Powell said new data are showing that the higher prices resulting from supply-chain disruptions and labor shortages will last longer than originally expected. Mr. Powell struck a more hawkish monetary policy stance, noting that the Federal Open Market Committee, which meets later this month to discuss monetary policy, may need to cut its supportive bond buying, and possibly raise interest rates earlier than expected in 2022, to prevent the economy from overheating and making inflation worse. On point…
The U.S. economy has shown signs of strengthening in this year’s final quarter after GDP growth slowed to just 2.1% in the third period. The news was encouraging yesterday, with Automatic Data Processing (ADP) reporting that private-sector payrolls rose by a better-than-expected 534,000 positions last month, while the Institute for Supply Management’s index of manufacturing activity inched higher, to 61.1, in November, marking the 18th consecutive month of growth dating back to spring of 2020 when the pandemic commenced stateside. This morning, we got another encouraging report on initial weekly jobless claims, which came in better than expected at 222,000; the consensus was looking for 240,000. Now, investors will be eagerly awaiting tomorrow morning’s report on November nonfarm payrolls from the Labor Department, which will be highly scrutinized by the Federal Reserve ahead of this month’s monetary policy decision.
However, investors should consider that the strong economic data of late, particularly the news on the jobs front, may not prove to be a catalyst for the near-term performance of equities, as it might push the Federal Reserve to tighten the monetary reins more aggressively in the coming months. Chairman Powell’s commentary this week telegraphed that the central bank’s near-term top priority may be fighting inflation rather than fostering employment, given the current economic backdrop, including an imbalance in the supply-and-demand equation. Historically, periods of monetary policy tightening have not been the most ideal environment for stocks.
So what is an investor to do right now? Our first recommendation is not to sell based on panic. The most prudent investment strategy, given the heightened market volatility and with investors facing a “wall of worry” that includes the concerns about the new strain of the COVID-19 virus, uncertainty about how hawkish the Federal Reserve may be in 2022, and the ongoing inflationary pressures, may be to maintain a diversified portfolio of high quality companies. Reports that lawmakers on Capitol Hill may be close to a deal to fund the government ahead of tomorrow’s deadline and push the timeline on a decision on whether to raise its debt ceiling to February 18th, may remove a possible near-term headwind for Wall Street.
In general, the stocks with the highest price-to-earnings multiples have been hit the hardest in recent sessions. Thus, we would target the stocks of companies that have strong management teams, high-quality balance sheets, and generate good cash flows, the latter of which gives many companies the ability to buy back their shares at lower prices. Investors like such buybacks both because they tend to stabilize the stock price, and over time raise earnings per share since there will be fewer shares outstanding. The stocks ranked 1 (Highest) and 2 (Above Average) for Safety by Value Line would include most of these entities and the group as a whole has historically fared better than the broader market during turbulent periods of trading.
Before the bell, the equity futures are indicating a partial rally for a number of sectors after yesterday’s late-session selloff. The stocks in the travel and leisure, airline, casino, and energy industries, which were punished yesterday on the renewed coronavirus concerns, are rebounding a bit in pre-market action. The energy sector will be on the radar of Wall Street, as the OPEC+ nations meet today to discuss crude production levels. However, the NASDAQ futures are indicating a lower start for the technology heavy composite, with a report from Apple (AAPL) that its iPhone 13 sales are not as strong as expected so far during the holiday shopping season weighing on the sector. Speaking of the technology group, a number of software makers released earnings after yesterday’s closing bell, including Snowflake (SNOW), CrowdStrike (CRWD), and Veeva Systems (VEEV). The stock of Snowflake is indicating a sharply higher opening, while Veeva Systems shares are down notably in pre-market action. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.