Stocks were off to a positive start to the week Monday after all three of the major averages finished last week in the red, as investors assessed the emerging threat of the omicron variant of Covid-19.
The Dow Jones Industrial Average jumped, while the Nasdaq Composite lagged, though it was still in positive territory. Here’s what was influencing the markets to start the week:
Shares linked to the economic reopening gained in Monday trading, including energy, industrials and airlines.Investors continued to sell tech stocks with relatively high valuations. Those shares dragged the market down to a losing week on Wall Street last week.The 10-year Treasury yield rebounded after falling last week amid the omicron threat.There’s a major shift underway at the Federal Reserve to bring about a faster end to its pandemic easing policies.Bitcoin lost $10,000 since Friday, including a sudden drop overnight from Friday to Saturday. The move showed decreasing risk appetite and is hitting related tech stocks.
The Dow gained 750 points, or 2.1%, on Monday while the Nasdaq Composite clawed back losses from earlier in the day and climbed higher by 0.8%. The S&P 500 rose 1.4%.
Stocks linked to the reopening of the economy gained, boosting sentiment on the Dow. Boeing rose 3% and Chevron added more than 2%.
The biggest gains came from leisure and hospitality stocks. United Airlines jumped 10% and Delta rose 8%. Major cruise lines gained between 8% and 12% gained. Shares of Wynn Resorts rose 8%. Travel booking stocks Expedia and Booking Holdings rose 8%.
Those moves followed comments White House Chief Medical Advisor Dr. Anthony Fauci made Sunday, saying the initial data on the omicron variant is “encouraging.” The comments came the same day CDC Director Dr. Rochelle Walensky told ABC News the new variant has now been discovered in at least 15 U.S. states, and less than two weeks after the World Health Organization designated it as being “of concern.”
“Clearly, in South Africa, omicron has a transmission advantage,” Fauci said. “Although it’s too early to make any definitive statements about it, thus far it does not look like there’s a great degree of severity to it.”
The Nasdaq, while higher, lagged the other major averages, led by Moderna, which fell 13%. AMD and Nvidia were off by 4% and 3%, respectively, and Peloton was down 4%. Tesla also fell, by about 2%.
Still, investors’ waning fears about omicron have pushed several high-priced tech shares that began the day lower to rally for most of the trading day.
“Reports of the Omicron symptoms being less severe are boosting risk appetite but it’s too soon to get carried away,” said Craig Erlam, senior market analyst at OANDA. “For one, we’ve seen this repeatedly since the initial news broke a little over a week ago. Markets have been very headline-driven and this is just the latest rally on the back of some positive reports.”
On Friday, tech stocks pulled the market lower. The Nasdaq Composite slid 1.92% with shares of Tesla as the biggest drag. Cathie Wood’s flagship Ark Innovation Fund fell more than 5% Friday, and all of the fund’s holdings are now in a bear market apart from two stocks. Teladoc Health, Zoom Video, Roku, Palantir and Twilio are some of the names that have registered steep losses.
But it was comments from the Fed that unnerved markets late last week, not fears about the omicron variant, according to Tom Essaye, author of the Sevens Report. Last week Chair Jerome Powell signaled the Fed’s focus is inflation, even with the new variant emerging. That led investors to investors rotate out of tech and into sectors with better exposure to higher growth.
Essaye called the market behavior a “sort of Taper Tantrum 2.0 as markets react to a more hawkish Fed and rotate into sectors with more positive exposure to rising rates.”
The central bank is likely to decide to double the pace of its taper to $30 billion a month at its meeting next week, CNBC’s Steve Liesman reported on Monday, based on comments by Fed officials. Initial discussions could also begin as soon as the December meeting about when to raise interest rates and by how much next year.
U.S. Bank Wealth Management’s Tim Hainlin said investors are also focused on what the terminal interest rate will be, and added he expects it to be lower that what investors are pricing in.
“The long-term growth rate is challenged by factors that are changing — demographics, productivity and longer-term growth in the labor force — and drive the economy in the long-term,” he told CNBC. “We still think those are muted relative to history, so the idea that the Federal Reserve would raise rates up until up to a rate that we’ve historically seen — we think that it’s not likely to get up to that level.”
Bitcoin traded around $57,000 on Friday morning, but by Saturday had plunged to around $43,000. By Monday the world’s largest cryptocurrency had clawed back some of its losses, last trading at around $49,035, according to Coin Metrics.
Hainlin declined to comment directly on cryptocurrency markets but said the weekend’s crash was consistent with what’s happening in the broader markets.
“Any speculative growth portions of the market are the ones that are trading off the most and that’s perhaps due to accelerated Fed tapering and Fed rate increases,” he said. “If you raise interest rates that decreases the value of those long-term cash flows for those long-term growth companies or parts of the market that are dependent on them.”
Microstrategy fell 5% and shares of Block, recently renamed from Square, fell more than 1%. Coinbase shares were lower too, although they reclaimed deeper declines from earlier in the day.
Slower-than-expected job growth also contributed to Friday’s selling. Nonfarm payrolls increased by 210,000 last month, the Labor Department said Friday, which was below the 573,000 number economists surveyed by Dow Jones were expecting.
Friday’s selling wrapped up a volatile week for the three major averages as investors evaluated new information about the omicron variant. All finished the week in the red, with the Dow registering a fourth straight negative week for the first time since September 2020. The S&P and Nasdaq Composite were both down for a second consecutive week.
Small cap names were hit especially hard, with the Russell 2000 falling 3.86% for the week.
“Despite our forecast for a flat year for the S&P 500…we are still bullish on pockets of the market, including small caps,” Bank of America said Friday in a note to clients. “Small caps are more domestic, more exposed to the services spending recovery, bigger beneficiaries of capex/reshoring and are inexpensive vs. large caps,” the firm added.
However, Bank of America said the potential upside for small caps hinges on Covid cases staying under control.