US Futures rally after a turbulent week
US and European stocks are set to bounce from last week's selloff as investors assess the Omicron Covid variant and the Federal Reserve's next move. Early clinical data from South Africa suggest that the new variant may cause less severe symptoms than previous variants. If this proves to be accurate, investors may find it an opportunity to buy the latest dip.
Investors are, in fact, more confused with the latest ambiguous US employment data, which showed nonfarm payrolls recording an increase of 210,000 in November, their lowest of the year, following an upwardly revised 546,000 reading in the previous month. However, the unemployment rate fell by 0.4% to 4.2% despite the labor force participation rate increasing to 61.8%, its highest level since the beginning of the pandemic. In short, one survey shows a significant slowing in job growth, and another indicates accelerating employment gains. It cannot be more confusing.
Another economic report released on Friday showed the services sector in the US is booming like never before. The ISM non-manufacturing index recorded a new all-time high of 69.1, surpassing the previous record set in October. This is where investors interested in forward-looking indicators need to look. If the Omicron variant does not disrupt this trend, the US economy is clearly in a strong position and no longer needs extremely easy monetary policy.
November's consumer price index (CPI) due on Friday is the last significant piece of data before the Federal Reserve meets next week on 14 December. Fed Chair Jerome Powell already indicated that he no longer viewed inflation as 'transitory' in his testimony before the Senate last week. So, another strong inflation print will likely justify winding down asset purchases more quickly, and investors focus will then shift to the pace of interest rates hikes.
Bond markets are already pricing in two to three rate rises in 2022. As a result, the short end of the US Treasury yield curve has been pushed higher in anticipation of tighter monetary policy. Meanwhile, the longer end of the curve has been dragged lower, implying lower growth and less inflation risk over the longer run. Hence, the yield curve has flattened the most since the beginning of the year.
A flatter yield curve is not necessarily a recession signal as long as it doesn't invert. And given the few alternatives for investors to park their money, equities will remain attractive. However, it's time to be very selective and well-diversified. Most unprofitable growth firms are already in a bear market, and so are speculative assets like cryptocurrencies. Healthy balance sheets, high profit margins, and strong pricing power are the criteria you need in today's portfolio. It doesn't matter if the companies are in growth or value sectors.