Omicron and the Fed's Outlook Shift on U.S. Monetary Policy Heighten Market Volatility

Jerome Powell and the word of the year 2021

Is it too early to start talking about the “word of the year”? If there was a word the year that made the spine of investors tingle, it would be the word “transitory.” All year it seemed the Fed and Jerome Powell told everyone who would listen that the inflation everyone experiencing is “transitory,” meaning not permanent. Fresh off of being nominated for a second term as Fed Chair, Powell has now decided to retire the use of “transitory” to describe the current bout of inflation. Powell made these comments during a hearing before the Senate Banking Committee. Powell, while speaking with Senator Pat Toomey, stated, “To many, it carries a time, a sense of short-lived. We tend to use it to mean that it won't leave a permanent mark in the form of higher inflation. I think it's probably a good time to retire that word and try to explain more clearly what we mean.”  

Powell made further comments that lead many to believe the Fed is now biased towards tightening monetary policy sooner than later and that the current high inflation will last well into 2022.1 Shortly after Mr. Powell’s comments, Wall St. dropped over one percent.2  

1 Fox Business. Nov. 30, 2021. https://www.foxbusiness.com/politics/powell-fed-wrong-inflation-not-transitory

2 Reuters. Nov. 30, 2021. https://www.reuters.com/markets/us/powell-yellen-head-congress-inflation-variant-risks-rise-2021-11-30/

Worst two day sell off in the S&P 500 since October 2020

US equity markets sold off hard on Tuesday and Wednesday of this week. Tuesday and Wednesday were the worst two days since October 2020 when looking at the S&P 500.  Data from Bank of America showed that hedge funds have been deleveraging. Bank of America’s hedge fund clients sold over $2 billion worth of stocks last week, according to their data this is the most selling since April of this year.  Data from Goldman Sachs Prime Brokerage released figures that net leverage fell to a one year low this week.  Their net leverage figure is a measure of industry risk appetite that takes into account long vs short positions.3 Several factors seem to be driving the selloff, the change in tone from the Fed, global spread of the Omicron variant of Covid 19, tax loss selling and leverage being unwound.  The Dow Jones Index swung nearly 1000 points intra day on Wednesday trading at a high of 35,004 around 11:19 am ET and touching a low of 34,022 during the last minute of trading during the regular session.4  

3 Bloomberg. Dec. 1, 2021. https://www.bloomberg.com/news/articles/2021-12-01/hedge-funds-cut-leverage-to-year-low-as-costly-tech-slumps-anew

4 MarketWatch. Dec. 1, 2021. https://www.marketwatch.com/story/december-set-to-start-with-gains-as-dow-futures-jump-300-points-after-selloff-11638357181

First case of Omnicron  confirmed in the United States

On Wednesday, the Centers for Disease Control (CDC) stated the first omicron variant of the coronavirus was detected in California. Arrival of the variant was expected, as it had already been detected in many parts of the world since being first detected in South Africa. The variant has about 30 mutations and its unknown effects have created uncertainty in global markets. It appears to be more virulent than the delta variant and researches from South Africa have stated that most cases that are linked to the Omicron variant have been mild. The South African researches have stated that existing vaccines are likely to offer protection against severe infection or and death.5

However, on Tuesday, the CEO of Moderna (MRNA), Stéphane Bancel, had an interview with the Financial Times where he stated that current vaccines will struggle with Omicron. Mr. Bancel stated in the interview, "There is no world, I think, where [the effectiveness] is the same level . . . we had with [the] Delta [variant], I think it's going to be a material drop. I just don't know how much because we need to wait for the data. But all the scientists I've talked to ... are like, "This is not going to be good."6

On Sunday, Moderna Chief Medical Officer Paul Burton stated that the company could roll out a reformulated vaccine against omicron variant in early 2022.7

5 Bloomberg. Dec. 1, 2021. https://www.bloomberg.com/news/articles/2021-12-01/cdc-confirms-first-case-of-omicron-variant-detected-in-u-s

6 CNN. Nov. 30, 2021. https://www.cnn.com/2021/11/30/investing/global-markets-stocks-oil/index.html

7 NBC Chicago. Nov. 28, 2021. https://www.nbcchicago.com/news/business/money-report/moderna-says-an-omicron-variant-vaccine-could-be-ready-in-early-2022/2694807/

Jack Dorsey steps down from Twitter

Twitter shares were halted for over an hour during trading on Monday. The company issued a statement that stated the CEO and Founder of the company, Jack Dorsey, stepped down from the role of Chief Executive Officer of Twitter.8  Dorsey will hand over the role to CTO Parag Agrawal, who joined the company in 2011. Shares of the company jumped up to over $52 a share after the stock started trading after the halt.9 Dorsey is currently the CEO of Square and will retail that role in Square. Since he'll no longer have to split his time between two companies and will be able to focus on Square, Dorsey will also have time to focus on bitcoin and cryptocurrency. While attending Bitcoin 2021 in Miami this past summer, he made the following statement: “If I were not at Square or Twitter, I’d be working on bitcoin. If it needed more help than Square and Twitter, I would leave them for bitcoin.”10

8 Bloomberg. Nov. 29, 2021. https://www.bloomberg.com/news/articles/2021-11-29/jack-dorsey-to-step-down-as-twitter-ceo-cnbc-reports

9 Twitter. https://s22.q4cdn.com/826641620/files/doc_news/2021/11/11-29-21_TWTR_Announcement.pdf

10 CNBC. Jun. 7, 2021. https://www.cnbc.com/2021/06/07/bitcoin-2021-elon-musk-jack-dorsey-winklevoss-twins-key-highlights.html

Square Rebrands as Block

On Wednesday, Square announced that it’s rebranding to “Block” as it expands beyond its current scope of business into blockchain technologies. Similar to how Meta retained its Facebook name for its flagship social media product, Block will continue to use Square for its “seller” business, which includes payment systems and banking products for merchants. As part of the rebrand, Square Crypto, Block’s initiative dedicated to advancing Bitcoin, will also change its name to Spiral.11

"The name has many associated meanings for the company — building blocks, neighborhood blocks and their local businesses, communities coming together at block parties full of music, a blockchain, a section of code, and obstacles to overcome," Square said in a statement.12

Currently, the company’s NYSE ticker symbol “SQ” will not change.

11 Square, Inc. Dec. 1, 2021. https://squareup.com/us/en/press/square-changes-name-to-block

12 Wired. Dec. 1, 2021. https://www.wired.com/story/square-block-new-name/

OPEC blinks and will not cut production

During the month of November, OPEC added production of 350,000 barrels a day. This is more of a production increase than the cartel had previously announced.13 On Friday, OPEC+ agreed to increase production in January by the 400,000 barrels that had been previously announced. This decision came as many in the threat of lower prices from the spread of the Omicron variant and US lead reserve releases hit the market.  The United States had reportedly pressured OPEC+ to accelerate output rises as US gasoline prices increased in the past few months. 14

13 Bloomberg. Dec. 2, 2021 https://www.bloomberg.com/news/articles/2021-12-02/opec-nations-boosted-oil-production-more-than-pledged-last-month

14 Reuters. Dec. 2, 2021 https://www.reuters.com/markets/commodities/opec-weighs-output-policy-omicron-fears-hammer-prices-2021-12-02/

About the Writer

My name is Allen Spence and I have been working in the retail brokerage industry for over 16 years. I joined Alpaca in March of 2021 and am now the Manager of Alpaca Trading Services. Before joining Alpaca I have worked in a retail branch environment, call center for active traders, and spent over seven and a half years as the team lead on an equity trading desk for a large regional broker dealer. I’m excited to be at Alpaca helping bring the markets to investors worldwide. I live in Florida and enjoy traveling and spending time with my family.

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