Merry Christmas and Happy New Year
Omicron, BBB and the Fed
Omicron is more of an inflation aftershock though the market responded to the minimal risk to domestic growth, and it may well be the variant that transitions the pandemic to endemic. The BBB Act is a net negative for investors in that it pays for government transfers with corporate tax hikes and drug price controls, a construct that will reduce earnings and capital investment as well as increase medical care and education inflation. While the Fed and Treasury withdrawal of liquidity is likely to pressure financial asset valuation, it will improve bank profitability and reduce the incentive for financial buyers in the housing market who are crowding out first-time buyers (26% of November existing home sales, down from 32% a year ago). In other words, these macro events, which led to a small pullback and significant increase in the realized market volatility, are fundamental positives for growth and reflation.