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Markets climbed a wall of worry to new heights in 2021. Buoyed by gains at the end of the year, Wall Street is now even more certain there will be an encore performance.
What’s happening: The risks identified over the past 12 months — looming interest rate hikes, rising inflation, an economic slowdown in China and new Covid-19 variants — haven’t gone away. But investors are increasingly convinced they know enough about these threats to discount them.
“We believe there is further upside for stocks, despite a strong run so far,” JPMorgan equity strategist Mislav Matejka told clients on Tuesday.
Matejka pointed to a few factors that underscore his call to “stay bullish.”
Coronavirus cases are soaring due to the highly contagious Omicron variant, which the US Centers for Disease Control and Prevention said Tuesday is up to three times more infectious than Delta.
But Matejka said that because the “new variant is proving to be milder than the prior ones,” it makes the “adverse impact on mobility much more manageable.”
This speaks to the belief on Wall Street that the economic hit from Omicron will be smaller than in previous waves even if cases shoot up, and that future variants could follow a similar pattern.
Matejka also thinks that the deceleration of economic activity in China is “by now largely behind us” as Beijing ramps up stimulus policies, and that the road map for interest rate hikes from central banks like the Federal Reserve is clear. Investors expect the Fed to raise rates three times in 2022.
“[The] Fed is unlikely to keep moving further and further into hawkish territory in the [first half of 2022], at least relative to what is priced in currently,” Matejka said.
On Tuesday, Citi raised its year-end target for the S&P 500 to 5,100 — a 6.4% jump from Tuesday’s close. The bank said the upgrade was “triggered by a 5% index rally over the final two months of 2021.”
The bank’s strategists said that “an overly assertive Fed, ongoing Covid pandemic impacts, and demand destruction in response to ongoing price increases all bear watching.”
But surveys of investors indicate that everyone is “keenly aware” of these issues, according to Citi.
The takeaway: Covid cases are hitting records. Inflation isn’t going away. The World Bank has slashed its forecast for China’s economic growth. And the Fed remains under the microscope. But Wall Street thinks that’s all old news, and nothing it can’t manage.
The CNN Business Fear & Greed Index is in “greed” territory after surfacing a “neutral” reading this time last week and “extreme fear” a month ago.
One caveat: Even if strategists feel good about the market as a whole, there’s room for shares in certain sectors to underperform. Tech stocks struggled on Tuesday as investors took notice of the rapid uptick in US Treasury yields. The benchmark 10-year yield has shot up more than 10% in just a few days.
Yields are spiking because interest rates are expected to increase as a means of reining in inflation. That in turn could ding future earnings for high-growth companies, making them less attractive investments.
OPEC and allies will pump more oil … if they can
The Organization of the Petroleum Exporting Countries and allies including Russia have decided to move ahead with a planned increase in oil output for February.
But pumping more crude could become increasingly difficult given constraints on production, analysts warn.
Back up: The coalition has raised its output target each month since August by 400,000 barrels per day to meet a surge in demand driven by the global economic recovery from the pandemic.
That’s helped keep a lid on the price of oil, which is trading near $80 per barrel globally and $77 per barrel in the United States.
But an increase of that size is starting to look aspirational, complicating the price outlook, according to UBS strategist Giovanni Staunovo.
“With several OPEC+ countries already struggling to increase production, the effective increase may be considerably less,” he said in a note to clients.
See here: Staunovo emphasized that Azerbaijan, Angola, Congo and Nigeria have had problems boosting production in recent months and “have likely already hit their production capacity.”
Russia’s production in December was flat compared to the previous month. And while Saudi Arabia is permitted to pump almost 10.3 million barrels per day in February, that’s pushing the upper limit of what the kingdom generally churns out.
These limits on supply could keep oil prices elevated in 2022, Staunovo said.
As global demand for oil rockets even higher in the second half of the year, Paul Sheldon, an advisor at S&P Global Platts, sees an “uncomfortably thin market buffer” developing. That may make oil prices more vulnerable to political developments that could limit fresh supply, such as friction in Iran nuclear talks.
Biden’s $1 billion bet to make beef cheaper
This week, the Biden administration offered a solution to surging meat prices: an investment of $1 billion to boost competition in the industry and a promise to ramp up regulation and enforcement of anti-competition laws.
But some experts say the move is unlikely to offer immediate relief at the grocery store, my CNN Business colleagues Danielle Wiener-Bronner and Matt Egan report.
The administration’s investment is designed to spark competition in the meat processing industry, which is dominated by a small number of massive companies. The White House argues that the concentration in the sector is chiefly responsible for higher prices for consumers.
It’s true that the vast majority of the meat processing market is controlled by a few players. But that’s been the case for decades, said James Mitchell, an expert in agricultural economics at the University of Arkansas.
“It’s been about the same for the last 20 years,” he said, arguing that consumers would have noticed price spikes well before 2020 if the highly concentrated industry was to blame.
Instead, Mitchell said, recent price spikes are largely the result of the same pressures contributing to inflation in other sectors: labor shortages and supply chain issues. Beef prices in November were up 20.9% from a year earlier, according to US data.
The recipients of the White House’s investment “are still going to face the same labor issues,” he added. “So that’s not necessarily going to change or fix the cost issue that consumers are facing.”
The ADP employment report arrives at 8:15 a.m. ET and will tee up official US jobs data for December coming Friday.
Also today: Minutes from the Fed’s latest meeting post at 2 p.m. ET.
Coming tomorrow: Will weekly US jobless claims hold near a 52-year low?