What's new this month? Equity markets were lower across the board this month. The new COVID variant named Omicron is causing some concerns for the market, along with the persistently high inflation. During Fed Chair Jerome Powell's congressional testimony, he said that it is time to retire the term transitory when it comes to inflation. He acknowledges that factors putting upward pressure on inflation will linger well into next year.
In terms of the near-term policy path, Powell said that it may be appropriate for the Fed to consider wrapping up its taper a few months sooner than initially envisioned. Furthermore, health care professionals are still trying to assess whether the new strain is more transmittable or lethal compared to its predecessors. It is also unclear how effective the current vaccines are against the variant. What we do know is that Omicron symptoms may be more mild than other variants, and the US does not expect a further lockdown or travel restrictions this winter.
What happens when the Fed starts to taper? Historically, when the Fed started to taper, the market is usually followed by a period of weakness, but eventually, recovers 6 to 12 month out. This is true for both the TSX Composite and the S&P 500, as we can see from the chart. The speed and volatility of the tapering may cause further volatility in the market for the next six month. We continue to believe that in the near term, we will see emergence of new variants, though broadening base of immunity, globalizing, and increasing availability of antivirals should dampen the virus impact to our economy and people's lives in general.
We expect that the global economy to continue to expand, perhaps at a slower pace next year. Inflation will remain firm over the short to medium term, prompting central banks to begin dialing back monetary accommodation. We expect bond yields to continue rising in this environment, acting as headwind for fixed income returns, which we forecast to be low or even slightly negative over the years ahead. As a result, we remain underweight fixed income in our asset mix.
Stocks, although elevated, offers superior upside potential relative to fixed income. While we recognize that valuations are demanding and there is little room for error, we're also consider that the potential for strong nominal GDP could continue to support decent gains in corporate profits, which should support the bull market. We hope you have enjoyed our market update. Until next month, stay safe, and have a wonderful holiday season.
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