Key Points:
- Markets became very volatile to close out November on news of a new coronavirus variant
- Stocks across the globe dropped as inflation, Fed tapering and potential lockdowns weighed on investor sentiment
- Risk assets will likely remain volatile for the rest of 2021 and into the new year.
The new Omicron variant of the coronavirus has caused a lot of anxiety among investors as we head into the home stretch of 2021. This new variant’s transmissibility and mortality rates are still unknown, but that hasn’t stopped nations across the globe from enacting travel restrictions and limiting activities. Fear that new lockdowns could cause the global economic recovery to stall turned investors away from risk assets in November and early parts of December. The S&P500 dipped 0.69% in November with financials (-5.68%), communications stocks (-5.16%) and energy (-5.09%) performing worst. Technology was the only bright side of the market gaining 4.35% as investors migrated towards semiconductor chip, software, and hardware stocks. Small caps were hit rather hard with the Russell 2000 losing 4.17%. In addition to the virus uncertainty, inflation has remained stubbornly high, causing the newly re-elected Fed Chairman Jerome Powell to suggest the tapering of asset purchases by the central bank could be accelerated.
International stocks sold off in November as a flight to safety in Treasuries caused the US dollar to rise. Despite much lower relative valuations compared to the US stock market, international stocks looked poised to trail the US market for 2021. Stocks outside of the US have struggled this year with the slowdown in the Chinese economy having rippling effects across Asia and Europe.
High quality bonds held up well during the month with TIPS (+0.89%), municipals (+0.85%) and intermediate Treasuries (+0.77%) providing a ballast for balanced investors. The riskier sectors of the bond market fell along with the stock market as high yield bonds lost 0.95%. Treasury yields fell dramatically in the last week of November as demand for high quality assets drove prices up (bond prices and yields move in opposite directions).
As we move into the new year, markets will likely remain volatile as inflation, omicron, interest rates and rich valuations remain headwinds to risk assets. Markets can be choppy over the near term as investors separate the news from the noise. However, over the long-term, stocks tend to follow their earnings and free cash flow but riding out the bumpy times is never an easy task.
Sources: Morningstar Direct, Wall Street Journal, T.Rowe Price, Morgan Stanley