December was a solid month for both the economy and the markets but a difficult month for medical news. The Omicron wave of the COVID-19 virus drove new case counts to all-time highs at year-end. Job growth kept improving, however, and consumer confidence and spending also continued to grow. Business confidence and investment remained strong, and the markets reacted to the positive news. The economic news continued to be strong through year-end, although we should note it was based on backward-looking data. The outlook for January is more mixed. The Omicron wave is likely to start showing up in the economic data. It’s quite possible it will also influence the markets.
Case growth rises. Looking first at the medical news, we saw new case growth take off at the end of December. More than 600,000 new cases were recorded on December 31, as the Omicron variant gained traction. That number is four times greater than the new case level at the beginning of December. In retrospect, the relative stability of most of December is not a good guide to what we will likely see in January. Although case growth has slowed very slightly to start January, that trend was likely due to slow reporting over the holidays. Signs are that case growth will remain at least around the current level, which is very high, for the next couple of weeks at a minimum.
Reasons for optimism. Encouragingly, though, there are signs that Omicron may be milder in its effects than the Delta variant. Although hospitalizations are up sharply, they have not increased by nearly as much as case growth. In addition, the current wave of case growth may be relatively short-lived. In both South Africa and the UK, data showed the growth wave peaking and then starting to decline in less than a month. So, there are some reasons to optimistic for January. Still, even if these positives hold—and they may not—January will be a very difficult month from a medical standpoint.
Economic strength continues. From an economic standpoint, we have reasons to be more cheerful. Although the Omicron wave is here, the economy, having weathered multiple previous waves, is more resilient. The economic data keeps getting better. Hiring for November was positive, if a bit weak due to labor shortages, and layoffs stayed below pre-pandemic levels. Consumer spending has kept growing. Similarly, while rising inflation and policy risks remain a concern, the December data showed signs those dangers may have peaked.
Jobs and spending data positive. Looking at the rest of January, the news is also good. The ADP jobs report came in at strong levels, and the most current spending data continues to improve. Despite the strong data from year-end, however, there is a real chance Omicron could hit both employment and spending. We need to keep an eye on those indicators. So far, though, the effects of Omicron are not showing up in the data. So, while economic risks remain, our overall prospects are positive for January.
Market expectations strong. The same applies to the markets. After a mid-December pullback on fears around the new variant and interest rate increases, the markets started January with stability. While there are real risks, expectations for continued hiring and spending will support growth in expected earnings. And, in fact, higher rates have usually been associated with strong market performance. The possibility of more volatility is real. Still, based on fundamentals, the markets could hold close to all-time highs in January, despite the small pullback.
The big picture. Looking at the big picture for January, the real risks are not economic but medical. They depend on how bad the Omicron wave gets—and how long it lasts. Right now, it looks like the economy will be able to ride Omicron out, at least through January.
There is more good news as well. As we enter 2022, politics is no longer an immediate risk. The debt ceiling issue has been resolved—at least for the moment. In terms of monetary policy, the Fed’s decision to start tightening policy has now largely been priced into the markets, with minimal negative effects. While risks remain—starting today with the release of the minutes from the Fed’s last meeting—the markets seem to like what they see. From a nonmedical point of view, January looks better in many ways than December did.
Fundamentals Remain Solid
Although the medical risks closed December at high levels, they may be shorter in duration and have less effect than the risks associated with previous waves. Given that, and the proven resilience of the economy, economic growth is likely to continue through January. And, despite risks on the market front, January looks likely to be positive here, too, as the fundamentals remain solid so far.
December was a mixed month, in many ways, and we have the prospect for some mixed signals in January, largely based on medical risks. But, according to what we know now, the positive prospects for developments in January are greater than the negative prospects. This should cushion any impact from the medical risks.