Commonwealth

The recent resurgence in COVID-19 cases and the emergence of the highly mutated Omicron variant are reminders that the pandemic is still very much a part of our lives. It is unclear how serious the health implications of the Omicron variant will be, let alone how governments, households, and firms will respond to it. While the financial markets have been through a range of emotions in the past few weeks, there is little evidence on how the underlying global economies will react.

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Throughout the pandemic, we’ve seen a large-scale exercise in risk assessment. Both governments and individuals have had to make a number of risk assessments, weighing the cost and benefits of different actions without definitive information. Investors are making investment decisions based on risk as well, as no one can be a perfect forecaster. So, to the extent we can, we must not only be conscious of the uncertainty of our investment returns but also of the risk that we will make poor choices when faced with different results, both good and bad.

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Here at Commonwealth, we’ve spent a lot of time breaking down earnings results and commentary in the past few months and after the third quarter ended. For the most part, business for corporate America is strong, and the post-pandemic rebound continues with a few disruptions related to the spread of new variants. But the most common theme we’ve heard discussed in the calls we’ve participated in relates to the supply chain and the negative impact it is having on earnings and how it could continue well into 2022. And it’s not just us. According to FactSet, 342 of the S&P 500 companies made some sort of reference to the supply chain in their quarterly earnings calls. That is at a 10-year high, and it highlights how much of an issue this has become in creating bottlenecks for the economy and corporate earnings. The supply chain is critical, as it can result in demand destruction as consumers choose not to wait around to make a purchase. It can also result in higher costs. Both of these factors put and likely will continue to put downward pressure on earnings in the near term.

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For many, the holiday season is the busiest time of the year. Undoubtedly, 2021 is no exception. The world is gradually returning to “normal,” and we’ve started to resume some of the festive traditions that were missed in 2020. Personally, one of the things I enjoy most about the holidays is watching Scrooge learn valuable life lessons in the movie A Christmas Carol.

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There were only a few major economic data releases last week, with a focus on international trade, consumer prices, and consumer confidence. Consumer inflation came in slightly above economist expectations in November, while confidence increased by more than expected to start December. This will be a much busier week of updates, with reports scheduled on producer inflation, retail sales, home builder confidence, new home construction, and industrial production. Economists will also be closely monitoring the results from the Fed’s December meeting.

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It has been going on two months since we last took a detailed look at the pandemic. Of course, a lot has happened since then. Between the winter wave of Delta, the emergence of Omicron, and the rising hospitalizations putting regional health care systems at risk again, there is a concern as to whether we are entering a third pandemic. I don’t think so, at this point. But let’s take a detailed look at where we are now and at the real question going forward—how bad will this get?

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