It was a good bounce-back session yesterday, but the lackluster close probably didn’t assuage the anxiety of those looking for instant resolution over the latest version of Covid-19.  Remember, there have been certain worrisome trends in place even before the rise of Omicron.

Big versus Small

It’s been promoted as growth versus value. But the fact is investors are simply more comfortable with rapidly growing large-cap names. And it explains why the Russell 1000 is so vastly outperforming the Russell 2000 (I write about the inherent problem with names graduating from the latter into the former hampering long-term gains).

Over the past five years, the outperformance has been palpable:

• Russell 1000 +113%
• Russell 2000 +70%

More Deterioration

The rapid slide of S&P 500 components tumbling below their 50-day moving average is reaching the late September low.

Underscoring just how quick and widespread internal destruction has been, only 21% of the S&P 500 is trading above their 20-day moving average, down from 84% in early October.

Market

All eleven S&P 500 sectors were higher paced by growth and those big names in green (below).

Breadth (Ouch!)

Market breadth was a little better but still painful, especially with those new 52-week lows.

Market Breadth	NYSE	NASDAQ
Advancing	1,858	1,994
Declining	1,523	2,681
52 Week High	35	57
52 Week Low	125	346
Up Volume	2.08B	2.45B
Down Volume	2.29B	2.40B

Economic Data

The November Dallas Fed Manufacturing report saw a month-to-month decline, but there were a lot of milestones (some good):

• General Business: 11.8 -2.8 
• Orders: 16.8 +3.0
• Shipments: 24.3 +11
• Employment: 28.5
• Prices paid: 82.1 (highest ever)
• Prices received: 42.2 -8 (600% above historic average)
• Wages: 47.6 +3.5 (highest ever)

Dallas Fed Manufacturing

Special Question

Texas Business Outlook Surveys

Data were collected November 15–23, and 360 Texas business executives responded to the surveys.

Pending Home Sales                                                                                              

Wages are at record levels and will continue to climb as difficulty finding workers remains a persistent problem. But it’s a vicious cycle, as prices paid and prices for finished goods also continue to gallop ahead.

The Statement from the National Association of Realtors says it all:

Buyers came roaring back to the housing market in October, even as mortgage rates rose.

Signed contracts on existing homes, so-called pending sales, jumped 7.5% from September, according to the National Association of Realtors. Sales were still 1.4% lower than October 2020, but last fall marked a cyclical high in the housing market.

Pending sales are a forward-looking indicator of sales that will close in one to two months. Wall Street analysts were expecting October pending sales to be flat compared with the month before.

Closed sales in October also rose unexpectedly.

“Motivated by fast-rising rents and the anticipated increase in mortgage rates, consumers that are on strong financial footing are signing contracts to purchase a home sooner rather than later,” said Lawrence Yun, NAR’s chief economist. “This solid buying is a testament to demand still being relatively high, as it is occurring during a time when inventory is still markedly low.”

Homebuyers, especially those on the lower end of the market, continue to find very few houses listed for sale. Total housing inventory at the end of October stood at 1.25 million units, down 0.8% from September and down 12.0% from one year ago (1.42 million). At the October sales pace, that represents an extremely low 2.4-month supply.

There is obviously inconsistency in the number, and its hard to pinpoint the true state of the housing market. However, taking in all the data and accounting for exogenous issues, I would say the industry is still going strong, and homebuilder stocks should be trading higher.

Pending Home Sales

Powell to the Rescue

After the close, the Fed Chair released his statement to be read today before the Senate Banking Committee:

Coronavirus and CARES Act

Chair Jerome H. Powell

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

Chairman Brown, Ranking Member Toomey, and other members of the Committee, thank you for the opportunity to testify today.

The economy has continued to strengthen. The rise in Delta variant cases temporarily slowed progress this past summer, restraining previously rapid growth in household and business spending, intensifying supply chain disruptions, and, in some cases, keeping people from returning to work or looking for a job. Fiscal and monetary policy and the healthy financial positions of households and businesses continue to support aggregate demand. Recent data suggest that the post-September decline in cases corresponded to a pickup in economic growth. Gross domestic product appears on track to grow about 5 percent in 2021, the fastest pace in many years.

As with overall economic activity, conditions in the labor market have continued to improve. The Delta variant contributed to slower job growth this summer, as factors related to the pandemic, such as caregiving needs and fears of the virus, kept some people out of the labor force despite strong demand for workers. Nonetheless, October saw job growth of 531,000, and the unemployment rate fell to 4.6 percent, indicating a rebound in the pace of labor market improvement. There is still ground to cover to reach maximum employment for both employment and labor force participation, and we expect progress to continue.

The economic downturn has not fallen equally, and those least able to shoulder the burden have been the hardest hit. In particular, despite progress, joblessness continues to fall disproportionately on African Americans and Hispanics.

Pandemic-related supply and demand imbalances have contributed to notable price increases in some areas. Supply chain problems have made it difficult for producers to meet strong demand, particularly for goods. Increases in energy prices and rents are also pushing inflation upward. As a result, overall inflation is running well above our 2 percent longer-run goal, with the price index for personal consumption expenditures up 5 percent over the 12 months ending in October.

Most forecasters, including at the Fed, continue to expect that inflation will move down significantly over the next year as supply and demand imbalances abate. It is difficult to predict the persistence and effects of supply constraints, but it now appears that factors pushing inflation upward will linger well into next year. In addition, with the rapid improvement in the labor market, slack is diminishing, and wages are rising at a brisk pace.

We understand that high inflation imposes significant burdens, especially on those less able to meet the higher costs of essentials like food, housing, and transportation. We are committed to our price-stability goal. We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.

The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation. Greater concerns about the virus could reduce people's willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.

To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to support a full recovery in employment and achieve our price-stability goal.

Thank you. I look forward to your questions.

Summary of Section 13(3) Facilities Using CARES Act Funding

(Billions of Dollars)

Portfolio Approach

Today’s Session

More scuttlebutt on Omicron has the market under pressure again this morning although there wasn’t a lot of new comments.

I think this is another overreaction to headlines – let’s not panic.  We need these kinds of tests for the bull market and I want to see weak hands bailout (they always come back at higher levels).

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