Coping with COVID… Again

Global equities saw pronounced weakness toward the end of the month as a new variant of COVID-19 was discovered, with fears that it could possibly be more contagious than prior variants and already have spread to other areas of the world.

As a result, several nations cautiously closed borders, slowed economic reopenings, and in some cases are preemptively instituting renewed business lockdowns. These measures sparked fresh concern that the economic recovery may once again be slowed by a new COVID variant wave.

International equity markets finished the month lower, falling 4.2%, with US markets holding up better, falling 0.8%. In fixed income, interest rates, after having drifted higher over the past several months, fell sharply as investors bought up fixed income in a bid for safety.*

Our Perspective

Omicron is a serious concern that warrants close monitoring, but we do not believe that its emergence requires a change to portfolios or our investment strategies at this time. We will keep a close watch on whether the variant sparks slower economic growth at home or abroad, as well as for its potential impact on fundamentals and markets as a whole.

As was the case with the Delta variant over the summer, investors seem to have quickly assumed the worst, with many stocks having been ‘thrown out with the bath water’. Variants remain a key risk, particularly if they cause governments to renew economic restrictions that hamper growth.

With that said, the latest variant comes at a time when equity markets were at all-time highs. The US stock market index has risen over 20% year-to-date, and equity market valuations remain elevated.* When valuations are high, risks can have an outsized impact on the market.

Our prior views on the Delta variant can be viewed in our September perspective.

Hitting Like on the Metaverse

Facebook, the company, rebranded to Meta in an effort to separate the multi-layered corporation from the notorious social networking app. Meta continues to embrace the digital wave with the new name reflecting the metaverse, a virtual reality world that people can explore.

Technology innovation aside, Facebook has emerged as a poster child for privacy concerns, and now the debate of negative societal impacts of social media. Whistleblower reports and other investigations prompted Capitol Hill hearings on whether government regulations are necessary and determine the company’s accountability for its influence (or lack of) in the matters.

Our Perspective

In short, while there has been a fair share of negative PR, none indicate a ‘smoking gun’ of financial ramifications. Monitoring of the situation is key, especially potential risks such as how Facebook balances content, engagement, privacy, and openness going forward.

The issues are a result of Meta being an innovative social media company operating in unchartered territory, and answers are not as black and white. It’s become apparent that tradeoffs are a condition of social media.

With that said, historically, our work highlights that when under regulatory review, companies on average outperform over time, reflecting the strength of the core business. Furthermore, it’s rare that concerns arise overnight that cause for an immediate reaction.

It’s clear that Facebook is facing a unique set of challenges, and as a pioneer in the social media industry, will remain in the spotlight. Meta plans to continue pouring money and resources into addressing the issues head on, and the core business remains stable and is growing rapidly.

For more, read our recent blog post, Talking Facebook and the Metaverse with Jay Welles, Lead Tech Analyst.

Our View
Economic Cycle		Growth remains robust, and the economy is in a stable mid-phase of the cycle; many countries are now lapping their massive fiscal spending programs, causing the massive liquidity tailwinds to begin to dissipate
Stock Market		US stock market volatility has picked back up; equities are just below all-time highs, and they remain strongly higher year-to-date; valuations remain a challenge and there are a variety of rising risks that warrant monitoring
Bond Market		Interest rates have risen well off their pandemic lows reflecting shifting expectations on inflation, growth, and central bank policy; corporate and municipal bond credit spreads remain historically tight
Foreign Exchange		While anticipating the dollar may weaken longer-term, in the short-term, it is difficult to make the argument that currencies will swing significantly
Important Issues on the Radar		COVID-19: unknowns of the new Omicron variant have sparked another wave of travel restrictions raising concerns that progress in the economic recovery may slow
		Trade Tensions: relations are in structural decline as China focuses on becoming a self-sufficient, global hegemon, potentially impacting global trade and supply chains
		China Credit Cycle: China is furthest along in its economic cycle; policy tightening may act as a headwind to growth; Evergrande is a major issue
		Inflation vs. Deflation: the significant demand shock and remaining economic slack are disinflationary broadly, but supply chain bottlenecks and rising commodity prices are pushing inflation higher

*Source: Refinitiv.

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International Equity markets mentioned within are represented by the MSCI ACWIxUS and the US markets mentioned within are represented by the S&P 500. ACWIxUS is designed to measure large and mid-cap representation across 22 of 23 Developed Markets countries (excluding the U.S.) and 27 Emerging Markets countries. The Index returns do not reflect any fees or expenses. The Index is denominated in U.S. dollars. The Index returns are net of withholding taxes. They assume daily reinvestment of net dividends thus accounting for any applicable dividend taxation. S&P 500 is an unmanaged, capitalization-weighted measure comprised of 500 leading U.S. companies to gauge U.S. large cap equities. The Index returns do not reflect any fees, expenses, or adjust for cash dividends. Index returns provided by Refintiv. Index data referenced herein is the property of MSCI, its affiliates ("MSCI") and S&P Dow Jones Indices LLC, a division of S&P Global Inc., its affiliates ("S&P") and/or its third party suppliers and has been licensed for use by Manning & Napier. S&P and its third party suppliers accept no liability in connection with its use. Data provided is not a representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none of these parties shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. For additional disclosure information, please see: https://go.manning-napier.com/benchmark-provisions.