Highflying stocks suffer in the face of Omicron

The Omicron variant poses a new challenge for a global economy already struggling to facilitate enough growth to outpace inflation.

Key Takeaways:

  • Gold dropped 6% after Powell’s renomination as Fed head. The price has still maintained an upward stair stepping pattern since the summer.
  • Powell expressed a hawkish tilt that has investors worrying about interest rate hikes earlier 2022.
  • Stocks with extremely high valuations, mostly centered around innovation and technology, are getting hit hard.

Gold retraces recent gains

After a very strong six-week performance, gold has surrendered some gains. Biden renominated Jerome Powell to lead the Federal Reserve for a second term, and Powell’s newly hawkish tone appeared to catalyze gold’s drop. Hawkish monetary policy focuses on tightening the money supply and controlling inflation while dovish policy focuses on accommodative spending measures that promote economic growth.

The gold price has come back to the 50% retracement line at $1,763/oz. This level has provided support several times in the last year and half.

Gold slumps back to 50% line

A perilous position

As we have discussed many times, the Fed is in a perilous position. The monetary stimulus measures taken to combat COVID-19 may have saved the economy from further pain, but the negative externalities have now arrived in full force. Powell officially retired the word “transitory” from his announcements regarding inflation.

Theoretically, gold prefers dovish policy because gold tracks the growth of money supply. A hawkish Fed may also be bearish for gold because gold likes low interest rates. However, as we explored in the blog Gold and Interest Rates, previous Fed Funds rate hikes have actually been bullish for gold.

This is because the Fed only tightens policy and raises rates when they absolutely must. Such is the case today. It doesn’t matter how much the Fed raises nominal rates as long as real rates (nominal rates minus inflation) stay negative. Honestly, we look forward to the day the Fed starts raising rates. On that day, the economy will have entered the perfect environment for the gold owner.

Up and back

Gold’s movement in the second half of 2021 are sluggish but healthy. We would like to see gold turn around here to keep the upward stair stepping pattern intact. If not, we could be looking at another test of the .618 Fibonacci line at $1,680.

6% rise on inflation data, 6% drop on Powell's renomination

Stock fragility

If we’re discussing fragile asset classes, equities take the cake. Over the last week, investors retreated from risky stocks that have led the 2021 charge. High-performing stocks tied to technology and innovation (many of which are profitless), tend to do poorly during times of higher interest rates. According to average price earnings ratios and other popular valuation metrics, the stock market has been in bubble territory for quite some time now.

Here are a few of those companies:
Snap Inc. (SNAP): Down 42% from 2021 high.

Snap down 42% from 2021 high

Twitter Inc. (TWTR): Down 45% from 2021 high.

Twitter down 45% from 2021 high

Beyond Meat, Inc. (BYND): Down 65% from 2021 high.

Beyond Meat down 65% from 2021 high

Zoom Video Communications, Inc. (ZM): Down 57% from 2021 high.

Zoom down 57% from 2021 high

Omicron rattles the markets

The U.S. reported its first Omicron case yesterday. The traveler had just flown from South Africa to California and was fully vaccinated. New COVID variants are troubling for many reasons, but we are interested in how they will prolong supply chain crunches and keep inflationary pressures rising.

Gold will have its heyday when markets lose their appetite for excessive risk. Return-seeking investors have poured over $900 billion into the stock market this year, more than the last 19 years combined. Just imagine what could happen to the price of gold when investors start to move that money into risk aversion assets.

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As always, thank you so much for reading – and happy investing!

Additional Resources:

Wall Street Journal: Paris-based research group raises inflation forecasts, but warns of possible fall in prices if Omicron impact is severe

Reuters: Germany, U.S. take new COVID restrictions as Omicron spreads across globe

Financial Times: Jay Powell looks past Omicron threat in hawkish pivot on inflation

Financial Times: Central banks do not have the luxury of time in tackling inflation

Yahoo Finance: Home price growth in the US slows down in September