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Key takeaways
The omicron variant is dominating the headlines. We assess the fundamentals by looking back on a big week for economic data and central bank statements.
Omicron – what we know so far
The evidence so far is anecdotal and based on laboratory experiments. With that in mind, it does seem that omicron is more transmissible but produces milder symptoms. We’ll know more later this week when lab results comparing the vaccine efficacy on the new variant are released. Of note is the Valneva vaccine where hopes are high that it will work well against omicron. The UK is attempting to reinstate a cancelled order for it and the EU have ordered 27 million doses.
But while Vaccines are the most obvious weapon against covid, treatments are also improving and the antivirals from Pfizer and MSD – so called covid pills – could be a game changer in 2022. If you take a pill after catching covid you could be 80% less likely to wind up in hospital. That means less pressure on hospitals which in turn means less restrictions, less impact on the economy and stronger equity markets.
There is much medical uncertainty but, on balance, we believe that the impact of covid and its many variants on the world economy and equity markets will be limited. It already is. We have had far more covid cases this year than in 2020 yet the according to estimates by Goldman Sachs the hit to global GDP is now just 2% compared with 20% at the worst days last year.
Economic fundamentals
There will be a impact from the new restrictions and both consumers and businesses may be nervous, but they have plenty of cash to spend and spending on goods is booming. Supply shortages are easing – we can see that in falling shipping costs and the shortage of truck drivers easing. Pent up demand is meeting pent up supply, so it looks set to be a happy Christmas for many businesses.
As analysts and companies prepare their 2022 outlooks, estimates for earnings this quarter have been cut. In terms of S&P 500 sectors, estimates have been revised down over the last two weeks by 2.6% for tech, and 1.6% for non-cyclicals. Other sectors have fared a little better, but the overall pattern is negative.
In terms of our current favourite indicator – corporates telling analysts to revise their estimate – we’ve seen a spike lower. These spikes have appeared before and we believe that the earnings outlook will bounce back.
The latest from central banks
There were lots of speeches from the Fed last week, notably from Jay Powell the chairman who finally conceded that the surge is US inflation was not transitory after all. This opens the way to an early lift of in Fed funds rate. But the market thinks tightening will proceed at a snail’s pace with little more than 50 bps of hikes in 2022. We think they’ll do twice that. That’s the roughly the amount of base rate rises priced into the UK and we think that is reasonable.
Will this stop the rally in risk assets? Probably not, markets usually take the early rate hikes in their stride. It’s an economic downturn that generates bear markets and given our view of the global economy, risk assets should continue to rally. Bonds by contrast, which performed relatively badly this year, look set to continue their underperformance in 2022.
Risk Disclaimer
Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
