Speculative stocks pulled major equity indexes lower this week. The Dow Jones Industrial Average experienced a mild decline of 0.91 percent. The S&P 500 Index fell 1.22 percent, the Nasdaq 2.62 percent and the Russell 2000 Index 3.86 percent.
SPDR Technology (XLK) declined 0.52 percent this week. However, speculative funds far much worse, with ARK Innovation (ARKK) sliding 12.69 percent. By way of contrast, Vanguard Dividend Appreciation (VIG) slipped 0.26 percent this week, while iShares MSCI Minimum Volatility USA (USMV) declined 0.49 percent. During turbulent market periods, funds like VIG and USMV help protect investors from spikes in volatility.
The headline-grabbing omicron variant of the SARS2 coronavirus was blamed for the sell-off starting last Friday. There was some evidence of the variant news affecting stocks in travel, leisure and healthcare. This fueled concerns of further lockdowns, which in many cases have materialized.
However, the more important story was the Federal Reserve’s openly hawkish policy shift. For the past three weeks, Federal Reserve officials have made increasingly hawkish comments on inflation, the taper and rate increases. This week, Chairman Jerome Powell said it was time to drop the word transitory when speaking of inflation. He also said accelerating the taper is an option. He did not walk back these comments after the market’s negative reaction. Later this week, FOMC member Ralph Bostic said he supports ending the taper by March. Importantly, the Federal Reserve is entering their blackout period before the December meeting so there will be no more public comments until then.
The Fed’s reversal of quantitative easing policies has always caused headwinds for markets, be it commodities, currencies or equities. This time, highly speculative equities and cryptocurrency have been the most affected. Aside from a dip in oil caused by the variant news, energy and financials have held up well because inflation remains high and investors anticipate rising interest rates. Blue chip names have been solid and many were up this week including Coca-Cola (KO) and Proctor & Gamble (PG).
This week’s economic data was solid. The ISM Manufacturing PMI met expectations. The Conference Board’s consumer confident index fell slightly because of inflation, but respondents said jobs are easy to find. Strong data out this week lifted the Atlanta Federal Reserve’s 4th quarter growth estimate to 9.7 percent.
This week’s employment number missed estimates, but it was likely caused by statistical adjustments. Investors who pay close attention to job reports may recall huge upward revisions of summer jobs number in September. The coronavirus pandemic threw the BLS for a loop and their statistical adjustments have been off this year.
Every November, many stores hire additional workers for Christmas. The BLS adjusts for this fact and deducts those temporary hires from the survey using a statistical formula. This produces a more consistent monthly number of long-term job growth. However, since we are still in a pandemic recovery, the BLS is deducting people returning to work or finding new jobs. Analysts who dig into the data believe the actual job gain last month was in line with estimates. That indicates a healthy economy quickly making its way back to full employment. The unemployment rate was more reflective of this reality: it handily beat the consensus forecast of 4.5 percent at 4.2 percent. Average hourly earnings increased 0.3 percent, missing the consensus by 0.1 percentage points.