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Sightline Weekly Market Update: Economic Data Begins to Show Omicron’s Impact

Equity markets in the latest week continued to slump into 2022 with the most significant weekly drop on worries of rising interest rates and slowing growth. The Nasdaq’s high-flying growth stocks came under the greatest pressure as Treasuries pushed higher (hitting 1.9%, the highest level since November 2019, before falling back to 1.76% by week’s end), causing analysts to re-evaluate discount models for valuations. The Nasdaq cascaded 7.55% in the week, moving into correction territory, down 11.99% year-to-date. The Dow fell 4.58% on the week, bringing the year-to-date total to a negative 5.7%. The technology sector of the S&P 500 helped drag the index lower as the index finished the week down 5.56% with a year-to-date return down 7.73%. The S&P MidCap 400 and the Russell 2000 lost 6.76% and 8.07%, respectively. The Russell 2000 followed the Nasdaq into correction territory, down 11.46% year-to-date. The TSX, while falling 3.33% in the week, held up best, supported by a 1.11% increase in the price of oil. Year-to-date, oil has increased 12.7%, limiting the loss in the TSX to 2.27%. European markets also came under pressure, but generally held losses under 2% on the major indices. The ECB President Christine Lagarde held firm that the central bank would not raise rates earlier than anticipated because the recovery was behind that of the US. While inflation is running ahead of the 2% target, she thought inflation would “gradually fall back below the target by the end of the year.” 1

On Tuesday, the Federal Reserve of New York released the latest Empire State Manufacturing Survey, reporting business activity dropping 33 points to -0.7% in January from December’s reading of 31.9%. While steady, new orders, shipments, unfilled orders, and delivery times were down from the previous survey. Omicron is attributed to the first decline since June 2020, and the latest survey is the first economic indicator showing the impact on the economy.2

The National Association of Home Builders confidence index fell 1 point to 83 in January. Higher inflation, supply shortages, increasing costs, along with a drop in traffic, muted optimism.3 On a more positive note, US home builders started construction on new homes at a 1% increase over November, and permitting was up 9% over the same period. Activity in the Northeast, the hardest-hit region with omicron and winter storms, had the largest increase in permitting followed by the Midwest. 4

On Thursday, the Labor Department reported the initial unemployment claims increased by 55,000 to 286,000. Continuing claims for all programs increased 180,114 from the previous week to 2,128,752.5 Typically, the data for the few weeks of the year is suspect with significant swings. Job losses are low in a tight job market, but the omicron virus could have impacted the data.6

In contrast to Tuesday’s Empire Manufacturing survey, the Philadelphia Federal Reserve Manufacturing Index increased to 23.2 in January compared to 15.4 in December. The expectations were for a 20 reading. The survey’s indicators showed increases in new orders and shipments, with the employment index positive but slightly lower. 7 As the omicron virus rotates from region to region, economic data may diverge as we are currently seeing in the negative manufacturing reading in New York contrasted to a positive reading from Philadelphia. On Friday, the gauge of leading economic indicators rose 0.8% in December after a 0.7 percent increase in November and a 0.7 percent increase in October. The Conference Board suggests the latest reading indicates continued economic strength into 2022; however, it cautioned that inflation, labor, supply shortages, and omicron could moderate economic activity.8

The latest pullback in the equity market is not unexpected, as investors must factor in the transition from accommodative central bank policies to a more hawkish stance. It should be remembered that even if rates move one point higher, interest rates will still be at levels significantly below what is considered normal levels over the last 50 years. The current correction will likely set up the next move higher, provided corporate earnings remain supportive and there is no exogenous geopolitical event.

 

Sources:

https://www.irishtimes.com/business/economy/christine-lagarde-rejects-calls-for-ecb-to-act-faster-on-inflation-1.4781740

https://www.newyorkfed.org/medialibrary/media/survey/empire/empire2022/esms_2022_01.pdf?la=en

3 https://www.marketwatch.com/story/u-s-home-builders-less-optimistic-due-to-high-inflation-and-supply-woes-11642518358?mod=economy-politics

https://www.marketwatch.com/story/coming-up-u-s-housing-starts-report-for-december-11642598355?mod=economic-report

https://www.dol.gov/ui/data.pdf

6 https://www.marketwatch.com/story/u-s-jobless-claims-jump-55-000-to-three-month-high-of-286-000-as-omicron-bites-11642685869?mod=economic-report

7 https://tradingeconomics.com/united-states/philadelphia-fed-manufacturing-index#:~:text=Philadelphia%20Above%20Forecasts-,The%20Philadelphia%20Fed%20Manufacturing%20Index%20in%20the%20US%20increased%20to,after%20falling%20sharply%20last%20month.

8 https://www.conference-board.org/data/bcicountry.cfm?cid=1

 

 

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors primarily through fee-based accounts.

Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

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