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Investors latch onto promising omicron studies, largely ignoring inflation data

Promising data on the new omicron variant of the virus that causes Covid-19 brought cheer to investors willing, for now, to overlook decades-high inflation.

MANHATTAN (CN) — Markets tanked last week but took little time to right themselves, making back much of what has been lost since Thanksgiving.

By the closing bell on Friday, the Dow Jones Industrial Average had gained 1,300 points for the week, nearly regaining the 36,000-point mark, while the S&P 500 and Nasdaq increased 174 points and 585 points, respectively.

Investors were encouraged by optimistic statements by health officials that the omicron variant of coronavirus was not expected to be as deadly as the delta variant, as well as preliminary studies from Pfizer that its Covid booster shots provided at least some protection from the variant.

Brad McMillan, chief investment officer at Commonwealth Financial Network, noted that the omicron variant likely has been in the United States for several weeks but that the growth curve of the virus remains moderate compared with that of the delta variant. “Let me be clear: it is still too early to sound the all-clear, but this data at least raises the possibility that the omicron wave will still be controllable, as earlier waves were, despite the higher transmissibility,” he wrote.

Outside of the progression of the omicron variant, the other big news for the week was that inflation increased 0.8% last month, according to the U.S. Bureau of Labor Statistics — news that did not make much of a dent on the recent bull rally.

The increase was slightly slower than the increase seen in October, but it still meant that the index has increased by 6.8% over the last year — the largest 12-month increase in the nearly four decades and outpacing expectations by a tenth of a percentage point. The jump in year-over-year core inflation — a measure that excludes the more volatile energy and food prices — hit 4.9% in November, the highest since 1991.

Nearly all sectors felt the inflation ramp. The energy index gained 3.5%, driven mainly by the 6.1% increase in gasoline prices, while vehicles remain at stickily high prices, seeing a 1.1% and 2.5% increase for new and used vehicles, respectively.

“Ongoing supply chain bottlenecks amid strong demand will keep the rate of inflation elevated through Q1, before supply/demand imbalances are gradually eased and inflation moderates markedly in [the second half of 2022],” analyst Kathy Bostjancic of Oxford Economics wrote.

Other experts, who previously had joined with the Federal Reserve in thinking inflation would not get out of hand, have tempered their expectations for 2022. The central bank has said since 2020 it would seek 2% inflation over an undetermined period, but Fed chair Jerome Powell acknowledged this fall that inflation has grown faster than originally thought.

Paul Ashworth, chief North America economist at Capital Economics, noted that, “although we think headline inflation has now peaked, it will decline only gradually over the first half of next year, and, because of that building cyclical pressure, we expect core inflation to remain above the Fed’s 2% target for a prolonged period.”

Friday’s report did not significantly dent markets, which continued to rise after the report was released.

“Interest rate hikes are starting to be priced into the bond market, and depending on how many there are next year and how quickly the Fed begins tightening, the stock market is likely to be adversely impacted,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance.

“The economy continues to grow at an above-average pace, but inflation is also increasing much more quickly than we have experienced in decades, so we are at an inflection point,” Zaccarelli said. He noted the next six to 12 months will show increased volatility in equities “as inflation, interest rates and Fed policy are all going to be shifting much more rapidly than they have in the past.”

The impact inflation has had on the general consumer population, however, has already been bad. Released shortly after the BLS inflation data, the preliminary December consumer confidence index by the University of Michigan showed a minor rebound but still relatively low confidence.

In fact, 3 out of 4 respondents in the survey stated that inflationary concerns and not unemployment is the biggest problem facing the United States right now.

The data bears that out since, as inflation continues to get worse, unemployment continues to get better. According to the Labor Department, the number of initial claims for the week ending December 4 fell 43,000 to hit 184,000 claims, the lowest point during the Covid era.

Job openings also increased to hit 11 million by the last day of October, while the number of job quitters fell by 4.7%, according to the Labor Department, indicating that the "Great Resignation" — the catchy name for the influx of workers quitting during the pandemic — is slowing down.

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