Market Analysis
December 6 | Market news

At a glance

Fears of a slowing global economy in the face of the Omicron coronavirus variant dampened investor sentiment. However recent economic data, especially the U.S. jobs market, continues its stronger tone.

U.S. Bank Global Health Check

The U.S. Bank proprietary Global Health Check incorporates more than 1,000 data points — including business climate factors and economic sector categories for 22 major economies representing 80 percent of total global wealth — to reflect our view of the current strength of worldwide economic growth.

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Chart of current global economic health; the data indicates a moderately strong economy (61.6) trending down to 54.7.

Source: U.S. Bank Asset Management Group, December 6, 2021.

Number of the week:


The year-to-date return of the Russell 2000 Index, measuring stocks of smaller companies. That trails the 20.8 percent return of the S&P 500, representing large company stocks.

Term of the week:

Mid-cap stock – The term used to designate a medium-size company, typically with a capitalization — or market value — of $2 billion to $10 billion. As the name implies, a mid-cap stock falls between large-cap and small-cap stocks.

Quote of the week:

“The Institute of Supply Management (ISM) report on U.S. services and manufacturing business activity shows acceleration in November. Services activity stood out, moving to an all-time-high in the survey. Both manufacturing and services saw improving employment, and some signs emerged of easing supply chain pressures.”

 Robert Haworth, CFA, Senior Investment Strategist, U.S. Bank

Global economy

Quick take: A continuing budget resolution pushed policy risks into the future. Meanwhile, stable to improving global business surveys helped investors see the positives in a disappointing U.S. payrolls report.

Our view: Economic growth is positive and vaccination progress continues in much of the world. U.S. coronavirus cases are rising since October, but hospitalizations are still lower than levels seen this fall. Overall, the global economy is in expansion despite risks from the coronavirus, fiscal and monetary policy uncertainties.

  • Key points: hides details

    • President Biden signed a short-term government funding bill into law after Congress agreed to fund the government through February 18. The next key issue is raising the debt ceiling; failing to do so could cut off U.S. spending by mid-December, according to estimates by Treasury Secretary Janet Yellen. Meanwhile negotiations in the Senate continue on the roughly $1.75 trillion “Build Back Better” legislation of social spending and tax increases.
    • U.S. payrolls in November added just 210,000 jobs, well below Factset consensus expectations of 530,000 jobs. However, the unemployment rate, which is determined by a survey of households, fell sharply to 4.2 percent and labor force participation rose to the highest level since March 2020, a positive sign for hiring companies.
    • The Institute of Supply Management (ISM) report on U.S. services and manufacturing business activity shows acceleration in November. Services activity stood out, moving to an all-time-high in the survey. Both manufacturing and services saw improving employment, and some signs emerged of easing supply chain pressures.
    • Global business activity surveys show divergent activity. European business activity improved in November while Asia was more mixed. Japan business activity improved for both services and manufacturing, but China activity was generally poor — especially among the private sector and relatively smaller firms. In Latin America, Brazil’s manufacturing activity slipped into contraction.

Equity markets

Quick take: A “wall of worry” is facing investors, and volatility appears more the norm versus exception. The COVID Omicron variant has the potential to slow economic growth, inflationary pressures are widespread, holiday shoppers appear to be strategic in their gift buying, monetary and fiscal changes are on the horizon and outsized year-to-date returns provide a catalyst for profit-taking.

Our view: Our longer-term thesis remains intact. Rising revenue and earnings, moderate inflation and relatively low interest rates support our positive bias looking into 2022. We expect elevated volatility until the impacts of the COVID variants (Delta and Omicron), inflation and supply chain dislocations become better known.

  • Key points: hides details

    • Performance remains superb and broad-based, even after last week’s pullback. The S&P 500 closed last week up 20.8 percent for the year, above the historical average annual return of roughly 10.5 percent. Additionally, all 11 sectors are in positive territory, with nine up 14 percent or more, reflecting the broad-based nature of year-to-date performance. Superb performance amid economic and policy uncertainty presents the backdrop for profit-taking.
    • Small- and mid-cap stocks are lagging, crimping the performance of growth companies. The small-cap Russell 2000 Index (up 9.3 percent for the year) is trailing the large-cap S&P 500 by 11.5 percentage points (up 20.8 percent) as of Friday’s close. It is hard to envision growth-oriented companies outperforming without improved performance of the Russell 2000.
    • Valuations remain fair as estimated earnings continue to inch higher. Consensus estimates for 2021 and 2022 are approximately $207 and $223 per share, respectively, according to Bloomberg, FactSet and S&P Global. This equates to respective price-earnings multiples of roughly 22 for 2021 and 20 in 2022, levels we consider elevated yet short of extremes.

Bond markets

Quick take: A flight to quality and away from riskier assets paired with expectations the Federal Reserve (Fed) may reduce monetary accommodation faster than previously anticipated pushed long-term Treasury bond prices higher and yields lower last week. Bonds with more credit risk still generated positive returns, although Treasuries outperformed.

Our view: Despite recent volatility, we believe the higher yields on lower-quality bonds offer fair compensation for their additional credit risk and can improve return potential relative to Treasuries. Credit fundamentals remain strong, decreasing default risk. We anticipate fading monetary policy support could facilitate greater volatility in 2022, which could moderate our preference for riskier, higher-yielding bonds in coming months or quarters.

  • Key points: hides details

    • We expect an announcement from the Fed that it will reduce asset purchases faster than originally expected. In a Senate hearing, Fed Chairman Jerome Powell said the economy is strong, and the risk of higher and more persistent inflation has increased and may warrant a more rapid reduction in bond purchases. We expect an announcement after the Fed’s December 14-15 meeting. This shift would provide the Fed flexibility to increase interest rates in the spring. The Treasury market has adjusted to anticipate earlier and faster rate hikes that ultimately slow long-term growth and inflation. Concern that tighter monetary policy could slow growth contributed to volatility in riskier asset prices and highlights the importance of diversifying risk in portfolios.
    • We maintain a glass half-full outlook on the economy, incorporating a bias toward higher credit risk exposures to improve income return. Issuers’ high cash balances, improving earnings and low debt costs support their ability to continue servicing debt. Riskier debt such as high yield corporate bonds, bank loans and high yield municipal bonds delivered positive returns last week despite tumult in the equity market, likely supported by confidence in issuers’ ability to pay back debt.

Real assets

Quick take: The emergence of the COVID Omicron variant has damaged the commodities and commodity producers that have outperformed for the past year. However, it has also boosted defensive sectors like Utilities, which outperformed by 2 percent last week. Investments with stable cash flows can outperform in times of turmoil accompanied by declining interest rates.

Our view: We maintain our glass half-full view of economic growth, but the Omicron variant created new concerns. We believe supply constraints and economic reopening will ultimately benefit real asset prices.

  • Key points: hides details

    • Real Estate beat the S&P 500 by 1 percent last week. Lower interest rates are a tailwind to real estate and enable capitalization rates to remain low.
    • Crude oil prices declined 3 percent last week. Domestic inventories of refined products increased, as did production. We still see the crude oil market as undersupplied, which should be supportive for prices.

This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market. The Institute of Supply Management Manufacturing Index, also called the Purchasing Manager's Index, measures manufacturing activity based on a monthly survey, conducted by the Institute for Supply Management, of purchasing managers at more than 300 manufacturing firms.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

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