Market Analysis
November 29 | Market news

At a glance

Friday’s market reaction to the Omicron variant of the coronavirus dominated headlines. Investors sought the safety of bonds, leading to drawdowns in riskier assets.

U.S. Bank Global Health Check

The U.S. Bank proprietary Global Health Check incorporates more than 1,000 data points — including business climate factors and economic sector categories for 22 major economies representing 80 percent of total global wealth — to reflect our view of the current strength of worldwide economic growth.

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Chart of current global economic health; the data indicates a moderately strong economy (62.1) trending down to 57.7.

Source: U.S. Bank Asset Management Group, November 26, 2021.

Number of the week:


The decline of the S&P 500 on Friday due to news of a new COVID variant emerging in South Africa.

Term of the week:

Omicron – The name of a new COVID-19 variant emerging in South Africa.

Quote of the week:

“Little is known about the Omicron variant, including whether it can evade existing vaccines or how severe it is relative to other mutations. At a minimum, it has the potential to slow economic growth, reduce the trajectory of earnings growth and temper overall equity returns.”

 Terry Sandven, Portfolio Manager, Chief Equity Strategist, U.S. Bank

Global economy

Quick take: A new COVID-19 variant in South Africa, named Omicron by the World Health Organization, is leading to travel bans and concerns about virulence and current vaccine efficacy. Recent U.S. consumer and durable goods activity is healthy and shows improvement, but a new viral surge could dampen activity into the busy holiday season.

Our view: Economic growth is positive and vaccination progress continues in much of the world. U.S. coronavirus cases have risen since October, and the Omicron variant is causing near-term concerns. Overall, the global economy is in expansion despite the coronavirus, fiscal and monetary policy uncertainties.

  • Key points: hides details

    • The new COVID-19 variant emerging in South Africa, named Omicron, is raising concerns for health officials and investors. Markets are awaiting updates of studies on vaccine efficacy against the new variant as well as transmissibility and symptom severity.
    • U.S. consumer health is undaunted by inflation pressures as we head into the holiday spending season. Personal income and spending accelerated in October, and weekly jobless claims fell to a 52-year low. The Federal Reserve’s (Fed) preferred inflation measure, Core Personal Consumption Expenditure Deflator Index, which excludes energy and food, rose 4.1 percent for the year ending in October. This may challenge the Fed’s stated pace of asset purchase reductions.
    • Durable goods orders excluding volatile transportation and aircraft equipment improved compared to last month and a year ago. Strong capital goods orders highlight companies’ willingness to invest in production capacity, which typically indicates high confidence in economic growth prospects.

Equity markets

Quick take: U.S. equities are impacted by Omicron, the new COVID variant, which threatens the pace of economic recovery, consumer confidence and investor sentiment. Meanwhile, holiday shoppers appear to be strategic, buying earlier and across multi-channels as supply chain constraints impact product availability.

Our view: While the Omicron variant clouds near-term visibility, our longer-term thesis remains intact. Rising revenue and earnings, moderate inflation and relatively low interest rates support our positive bias into 2022. We expect elevated volatility until the impacts of the COVID variants (Delta and Omicron), inflation and supply chain dislocations become better known.

  • Key points: hides details

    • Stocks retreated, with Omicron showing the potential to slow economic growth. The S&P 500 declined 2.5 percent on Friday and 2.2 percent overall for the week. Little is known about the Omicron variant, including whether it can evade existing vaccines or how severe it is relative to other mutations. At a minimum, it has the potential to slow economic growth, reduce the trajectory of earnings growth and temper overall equity returns.
    • U.S. equities are due for some consolidation. The S&P 500 is up 22.3 percent for the year after Friday’s pullback, with all 11 sectors in positive territory and nine up 15 percent or more. The historical longer-term annual average return of the index is approximately 10.5 percent, suggesting that a pullback is warranted and within the normal ebb and flow of an upward-trending market.
    • Earnings continue to inch higher; valuations remain compelling. Consensus earnings estimates remain approximately $206 per share for 2021 and $222 for 2021, according to Bloomberg, FactSet and S&P Global. As of Friday’s close, the S&P 500 trades at roughly 22 times 2021 estimates and 21 times 2022 estimates, levels we consider fair given the current economic environment.
    • Black Friday sales are less predictive than previous years, with shoppers spending throughout the season. In-store traffic on Black Friday was up 47.5 percent over last year but down 28.2 percent from pre-pandemic levels, according to Sensormatic Solutions. Online sales were essentially flat compared to 2020, according to Adobe Analytics. COVID, worries about product shortages and the ease of online shopping are encouraging consumers to shop earlier and across multiple channels.

Bond markets

Quick take: Fear of the new Omicron COVID variant drove investors to seek the safety of Treasury bonds on Friday, causing yields to fall and prices to rise. Below investment-grade bond prices fell. Bond prices are reverting somewhat early this week after investor sentiment calmed over the weekend.

Our view: We maintain a positive outlook for bonds with increased credit risk, since high cash balances and the low cost of debt has improved issuer’s ability to make bond payments. We believe the additional income on high yield corporate and municipal bonds, bank loans and mortgages not backed by the government is fair compensation for their credit risk and can improve return potential relative to higher quality bonds. Exposure to high-quality bonds can help offset equity volatility such as Friday’s slight selloff.

  • Key points: hides details

    • The Fed’s debate on inflation intensified, according to November meeting minutes released last week. While the committee came to a consensus to reduce bond purchases by $15 billion a month starting in November, the minutes indicate some officials felt a faster reduction in purchases may be warranted. This dovetails with recent comments from Fed officials to discuss accelerating reductions at their December 14-15 meeting. If asset purchases conclude sooner than anticipated, it opens the door for an earlier rate hike to stem inflation; the Fed wants to conclude asset purchases before raising rates. The market dialed back rate hike expectations Friday in response to concern that the Omicron variant and related restrictions could slow economic growth.
    • Corporate bonds underperformed last week on reduced appetite for credit risk. Worries over Omicron reduced investor’s risk appetite, but the drop in corporate bond prices was likely exacerbated by lower trading volumes on Friday following the Thanksgiving holiday. Treasury yields fell to reflect lower growth and inflation expectations. While lower growth can weigh on corporate operating cash flows that can cover debt payments, high cash levels already held by issuers, the low cost of debt and accommodative refinancing conditions should keep defaults infrequent. We favor high yield corporate and municipal bonds, bank loans and mortgages not backed by the government to increase portfolio income while credit fundamentals are strong.

Real assets

Quick take: Real assets declined along with the broader market last week. Economic reopening remains a positive for cyclical demand and should benefit real assets going forward.

Our view: We maintain our glass half-full economic outlook, but the Omicron variant created new growth concerns in the market. Ultimately, we believe supply constraints and economic reopening will result in higher real asset prices.

  • Key points: hides details

    • Real Estate trailed the S&P 500 by 0.50 percent last week. The sector should benefit from economic reopening. However, the Omicron variant is fostering concerns about the return to office and leisure travel.
    • Crude oil prices declined 10 percent last week. Despite rising domestic inventories and production, prices faltered as investors priced in fears of renewed travel restrictions and slower economic growth on Friday. As long as the global economy continues its recovery, the oil market appears undersupplied, which should be supportive for prices.

This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Personal Consumption Expenditures Index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

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