Confluence of Market Pressures Could Present Buying Opportunities

Markets are currently rallying once more, but the most recent three-day pullback is a reflection of investor concerns around Fed hawkishness, Omicron uncertainties as the new variant surges, continuing supply chain issues, and the failure of the Build Back Better plan to garner enough votes.

All of these fears, coupled with a holiday week that will see thinner volume markets, could create more volatility and present buying opportunities for investors heading into Christmas, blogs Mark Hackett, chief of investment research for Nationwide’s Investment Management Group.

A recent Bank of American Global Fund Manager Survey found that cash levels were up to 5.1% from 4.4% as equity exposure was at its lowest since October of 2020. Those that participated in the survey collectively indicated that they were a net 36% overweight in cash, and the CNN Fear and Greed Index is even closer to “extreme fear.”

Omicron’s surge has COVID-19 cases the highest they have been in four months since the last Delta wave brought hospitals and emergency rooms to capacity and beyond. What is most telling and foreboding is the fact that New York has the second-highest vaccination rate of any state in the U.S. and yet is experiencing record case counts. Omicron has also within the span of a week vastly outpaced Delta, with 73% of sequenced cases last week being reported as Omicron, even in areas that have active Delta spread.

The Fed also announced last week that it would accelerate tapering and anticipate wrapping up the bond buying stimulus in March 2022, and the “dot plot” has indicated almost all Fed members supporting three interest rate increases next year compared to the previous anticipation of a maximum of one. It has officially changed its verbiage around inflation, eliminating the term “transitory” in recognition that current inflationary factors are longer-lasting.

The setback for the Build Back Better in failing to gain enough votes with Senator Manchin’s opposition means a variety of things, but Democrats have committed to working on a version that they believe Manchin will support early next year. For now, the chances of tax changes that the bill would have wrought for corporations, buybacks, and high income individuals are greatly diminished.

Hackett reminds advisors that “volatility will likely be elevated this week as volume and participation is affected by the Christmas holiday,” with thinner volume markets leading to more elevated responses within markets.

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