Historically, the end of the year means a strong performance for the US stock market. However, this year, fears are creeping in among investors that the new Omicron coronavirus variant along with a more hawkish Federal Reserve may violate the historic trends. Do these assumptions hold any truth?
The S&P 500 has its ups and downs. However, since 1950, the index was extremely high by the end of a year. It has been seeing a positive return in December 74% of the time since 1928. According to the Stock Trader’s Almanac, November and December have been the S&P 500’s second- and third-best months for 70 years straight. In those two months, the index typically rose by an average of 1.7% and 1.5%, respectively.
In 2021, fears over the new COVID-19 variant and its impact on global growth led to 0.8% monthly loss in November. In addition, the hawkish announcement of Federal Reserve Chair Jerome Powell who suggested the Fed might end their bond purchases a few months earlier than had been anticipated caused additional worries. Stocks fell down upon the news, while yields on Treasury bonds rose.
On the one hand, historical evidence shows that December has remained a month of strong market performance throughout various crises. So far this year, the S&P 500 is up 21.6%. This result conforms to a common growth scenario: weaker November after a robust rest of the year. There were already 10 recorded years when the S&P 500 was down in November but up more than 10% for the year. As data from Bespoke Investment Group shows, in all previous cases, stocks of the leading U.S. publicly traded companies still finished December with a solid gain.
On the other hand, expectations of a more hawkish Fed are likely to hinder the performance of technology stocks. Rising yields on Treasury bonds which typically result from the expectations of a more aggressive Fed policy threaten to decrease the lofty valuations of innovative companies. The reason is their utmost value lies quite far in the future when the innovative solutions find their widespread use. Thus, in the face of possible faster tapering of Federal Reserve stimulus and higher interest rates, the value of longer-term cash flows may fall.
Stronger-than-expected elements in Friday’s U.S. employment report further reinforced the prospects of a more hawkish Fed and weighed down growth stocks that largely deal with tech.
Indeed, the S&P 500 technology sector has fallen steadily since the 1st of December. The performance of tech companies included in the S&P 500 decreased by 0.44% in 5 days and by 1.65% during December 4 alone. Big 5 Tech Stocks now account for 23% of the S&P 500, so their performance is driving the general index whether up or down. Therefore, SPX performance has fallen by 1.22% in the last 5 days.
In addition, investors are attempting to take into account the potential seriousness and severity of the Omicron variant for both national and global economies. Goldman Sachs has reviewed a few possible scenarios, where the worst one could slow global growth to 2% in the first quarter of 2022, which is 2.5 percentage points below the bank’s current forecast.
Despite all risks, many investors and experts believe stocks will remain resilient. Even if the reversal of quantitative easing policies implemented by a central bank comes earlier than expected, higher rates haven’t always knocked off bull markets. The S&P 500 rose an average 5.3% in a year following the first increase in 17 policy tightenings registered since 1946. What matters most is the pace of tightening. The equity benchmark fell 2.7% on average during faster rate hikes while rising 11% during slow ones. Therefore, if the interest rates rise gradually, they won’t harm the market much, especially coupled with the historic year-end highs scenario.
As for the Omicron fears, until its severity is better studied, the Biden Administration and other governments are reluctant to impose more lockdowns, which would be economically damaging. There is “reason to be optimistic,” said Francis Collins, the director of the National Institute of Health, as the available vaccines have provided significant protection against the previous variants without lockdown infringements.
As of 7 December 2021, and since 1 December 2021, 64 additional SARS-CoV-2 Omicron VOC cases have been confirmed by the WHO, bringing the total to 274 confirmed cases. All cases for which there is available information on severity were either asymptomatic or mild. No severe cases and no deaths have been reported among these cases so far. Hopefully, the new detected variant will not bring down vaccines’ efficiency, therefore, leading to a market rebound.