Week in Review


Week in Review: December 3, 2021 

Fed’s Accelerated Taper Talk Overshadows Omicron’s Cloud


News of the first U.S. omicron case, the Federal Reserve’s (the Fed’s) omission of the word “transitory” to describe inflation and the Fed’s expectation of accelerating the tapering of asset purchases in December spooked equites. These concerns ignited market volatility, leading to the S&P 500’s biggest two-day sell-off since October 2020. During this sell-off, value notably outperformed growth as risk appetite waned. The market’s stark response to escalating risks reminds investors of the sensitivity to equity performance as it relates to the spread of the virus.

Given the current information, the tail risks of omicron appear quite small, but overall risks are skewed to the downside. Initial reports indicate mild or no symptoms, and the U.S. is now better equipped with vaccines that should retain some efficacy. However, the many unanswered questions surrounding the omicron variant and the potential policy response and its impact on consumer behavior make it too early to shift our tactical positioning within equities (see Figure 1). In our view, the introduction of new variants will likely become the “new normal” that markets will have to learn to live with, along with preventive booster shots.

As equities adjust to inflationary concerns, the U.S. economy continues to recover, albeit at a slower than anticipated rate. The 210,000 jobs added in November that came in below estimates and the drop in the unemployment rate to 4.2% added conflicting signs to the pace of the recovery (see Figure 2). Although the labor market is still facing a worker shortage along with rising wage pressures, it is still at a relatively healthy position. Meanwhile, consumer sentiment fell slightly amid recent equity volatility, which could lead to skepticism about the robustness of the recovery. But it’s not too early for this downward sentiment trajectory to reverse. Surging retail sales demonstrate that spending habits are not reflecting weakening confidence. In our view, the holiday season will continue to boost spending, corporate earnings and equities.            

The economy’s trajectory will highly coincide with the path of inflation. As recently voiced by the Fed, inflation will likely be more durable than expected. We expect inflation to moderate by year-end 2022. The major subcomponents of the Core Consumer Price Index (CPI), such as shelter, used cars and trucks, and commodities (less food and energy), are still turning higher. Whether these components keep on accelerating over the next year will largely determine the gravity of inflation going forward. A continued surge in energy prices, the main driver of Headline CPI, has continued to have trickle-down effects on Core CPI, increasing the cost of travel and goods. We view the sustainability of these gains in the subcomponents as limited, due to their already high base levels.

Most companies have partially passed inflation on to their customers and avoided margin compression. However, if the worst fears of the omicron virus materialize, we believe it will worsen already stretched supply and labor shortages. In our view, in this worst-case scenario (which we believe is unlikely to occur) the variant-related disruptions could boost inflation significantly higher than 3% over a long period of time, which would eat into corporate margins and weigh on equities. Correspondingly, we expect interest rate volatility to increase going forward, which could cascade into equity markets.

Nevertheless, our base-case estimation is that the omicron variant will not materially alter the macroeconomic backdrop in which U.S. growth exceeds expectations in the tail-end of the year and into the first half of 2022. This should continue to bolster top-line revenues for corporations while also supporting margins, ultimately powering profits higher. Those segments of the equities market most exposed to our preferred factors of higher quality and earnings momentum should be well positioned given the current market environment, even in periods of episodic volatility. We remain optimistic and in favor of U.S. equities versus European and Emerging Market equities, which we view as more vulnerable to the omicron variant.



  • Q3 unit labor costs, which we expect to remain unchanged, come out on Tuesday (8.3%).
  • November’s CPI, which we expect to have increased year over year, comes out on Friday (6.7%).
  • November’s Core CPI, which we expect to have declined month over month, comes out on Friday (0.5%).

Figure 1: Tracking Omicron


Source: WHO, NY Times, as of December 3, 2021.


Figure 2: U.S. nonfarm payrolls vs. labor participation rate


Source: Bureau of Labor Statistics, as of November 30, 2021.


Market Returns (USD) as of 12/2/2021





Global Equities

MSCI All Country World

-2.7% 3.1% 14.6% 18.3%

S&P 500

1.2% 9.4% 26.8% 33.8%

Dow Jones Industrial Average

-3.1% 2.8% 15.2% 18.1%


-3.7% 5.7% 19.1% 24.3%

Russell 2000

-5.3% 0.3% 12.7% 21.2%

First Republic Founders Index

-5.0% -3.0% 7.5% 15.4%

Russell 1000 Equal Weighted

-4.1% 1.5% 17.9% 22.6%


-2.7% -1.5% 6.8% 10.3%

MSCI Emerging Markets

-1.4% -1.2% -2.4% 2.8%

Fixed Income

ICE BofAML Municipals 1-10 Year A-AAA 

0.2% 0.2% 0.5% 0.9%

Bloomberg Barclays Intermediate Government/Credit

0.5% -0.6% -1.5% -1.1%

Bloomberg Barclays High Yield Bond

0.0% -0.9% 3.6% 5.2%

Market Levels


Week Ago

Year End

Year Ago

S&P 500

4577.1 4594.62 3756.07 3669.01

Dow Jones Industrial Average


34639.79 34899.34 30606.48 29883.79

10-Year U.S. Treasury Yield (Constant Maturity)

1.44% 1.48% 0.93% 0.95%

Gold ($/oz)

$1,768.74 $1,802.59 $1,898.36 $1,831.28

Crude Oil ($/barrel)

$66.50 $68.15 $47.49 $44.87

U.S. Dollar / Euro ($/)

1.13 1.13 1.22 1.21

U.S Dollar / British Pound ($/£)

1.33 1.33 1.37 1.34

Japanese Yen / U.S. Dollar (¥/$)

113.11 113.38 103.25 104.42