Are Policy And Politics Rising Risks For The Markets?

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November was a solid month for the economy. But in terms of medical news and

financial market? It was a difficult one. First, the Fed announced its plan to tighten monetary policy. Then, a new form of COVID-19 emerged. By the end of the month, combined news pulled the market down from mid-month gains to more mixed results.

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Let’s take a look at what’s in store for the coming month to help you determine.

Mixed news in November

market data mixed Here in America, Nasdaq
NDAQ
November showed little gains, but the S&P was down slightly and the Dow fell more than 3%. Fixed income assets were mixed. Spreads rose and saw major declines in international markets, falling between 4 percent and 5 percent in both developed and emerging markets. The obvious question is, what inspired this performance—and what does it mean for December?

Medical risk theory. Seeing firsthand the positive news, November brought signs that the delta wave of winter may be slowing. The data showed that both the case growth and the positive test rate in the US remained modest by recent standards. The announcement of the Omicron version raised concerns about a spike in more cases in December, but that risk is yet to be met. So, despite the headlines and fears surrounding the new coronavirus variant, we know very little about it. For now, the risks remain largely theoretical. Given this, we definitely need to keep an eye on the medical risks—they are real. But they are not of much concern right now.

strong economic data What if we see an omicron wave? After experiencing two delta waves, the economy has become more resilient, so any economic damage will be less likely. For example, in November the economic data kept improving. Hiring for October was healthy, and the employment report included a substantial upward revision in September numbers. As a result, job growth remained strong and layoffs returned to pre-pandemic levels.

Consumer spending continued to rise in November despite the delta wave. Similarly, while rising inflation and policy risks remain a concern, last month’s data indicated that those threats have peaked. Looking forward to December, the news is also good. The ADP jobs report strengthened, and current spending figures continued to improve. Therefore, while economic risks remain, they appear to be moving downward rather than upward.

big picture for december

The market seems to be stable. After a pullback on fears about a new Omicron variant and a hike in interest rates, markets started December with stability. Although the risk remains, continued hiring and spending should support expected earnings growth. In fact, higher rates are usually associated with stronger market performance. Still, the potential for more volatility in the market is real. Going by the economic fundamentals, however, the market could see a capture at all-time highs, despite a minor decline in December.

Potential medical risk. Looking at the big picture for December, the real risks are not economic, but medical (probably) and policy and politics (definitely). The medical risks that come from the Omicron version may be much worse than what we can see now. Still, we know that the medical risks can be contained. We’ll have to wait and see what happens.

Political and policy risk. The more definite risks are politics and policy, triggered by a conflict over the credit limit. This scenario will unfold in December, with the real possibility of another government shutdown. We’ve seen this movie before, but it’s possible that some sort of solution will be found before a shutdown is necessary. However, the uncertainty created by the situation has the potential to negatively impact the markets and the pace of economic recovery in December.

In terms of monetary policy, the Fed’s decision to begin tightening its programs will also begin to factor in. Policy changes will take months, but they are now turning into headwinds in December. The policy tightening plan is a good sign, meaning the Fed sees the economy as healthy. Still, the prospect of Fed members increasingly tightening or even commenting on the subject during December could create further volatility in the market by the end of the year.

policy and political risk

In short, the clinical progress we have made in the past months, including November, may be at risk. So far, we don’t see signs of a reversal of medical reforms in December. The economic progress we have seen is likely to continue. Risks remain for the markets, but December is also likely to be positive on this front. The real risks come from outside the economy in the form of policy. Although the uncertainty here may materialize this month, the infrastructure remains solid so far.

November has been a mixed month in many ways. In December, we are likely to have some more mixed news, based largely on political risks. But, based on what we know now, medical and economic news is more likely to be positive than negative. The current environment should outweigh any impact from political risks.

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