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Market Recap: Thursday, December 2

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The S&P 500, Dow and Nasdaq advanced and extended gains into afternoon trading. Jack Manley, J.P. Morgan Asset Management Global Market Strategist and Randy Frederick, Schwab Center for Financial Research Managing Director of Trading and Derivatives joined Yahoo Finance Live to discuss today’s market action.

Video transcript

JARED BLIKRE: And, Randy, I just want to begin with you before the bell-- what are you making of today's price action? Is this just a dead cat bounce? Or have we made meaningful progress maybe on the way to record highs again?

RANDY FREDERICK: I wouldn't classify it as a dead cat bounce, because that typically implies that you're getting a bounce up in what it will be likely an extended downtrend. I just don't really see that. I think what it is is it's just volatility. And we're going to have volatility until we get some more certainty about this Omicron virus.

When it first hit last week Friday, the markets were very surprised because they were basically sitting at all-time highs. Earnings season was almost over. And so they become very sensitive to news. We've had some very big swings in both directions. That's the absolute textbook definition of volatility.

Once we get more clarity on whether or not the existing vaccines are going to be effective, on whether or not, this one is just much more contagious, or whether it's more contagious and also more deadly-- until all those things are resolved, that's probably going to be a few weeks, we're likely to see some more of this seesaw action. But no, I think in the longer run, I do not think we're headed into a big extended downturn. We're only down, I think, 2.5% at this point from the high.

JARED BLIKRE: And we're going to resume this conversation after the bell. I want to check the markets right now on the YFi interactive, because we are seeing stocks still in rally mode-- Dow up 1 and 3/4 of a point and the S&P 500 up just over 1%-- NASDAQ the laggard up about 7/10 of a percent. But really, the Russell 2000 has been the outperformer of the day. We'll get into some small cap talk after the bell.

Just want to check the sector action for today. And we can see it's all about the value play. XLF, the financial sector ETF, that's up nearly 3%. And guess what? Industrials not too far behind it. Then we have energy, real estate, materials, communication services rounding out the outperformers of the day. As you can see, all of the sectors in the green. The big laggard is health care. Here's that closing bell on Wall Street.

[BELL RINGING]

ADAM SHAPIRO: All right, that's a wrap. One more day to go in the trading week. And of course, we have the jobs number tomorrow. But here's where it looks like we're going to settle. You just heard Jared give us the numbers. The Dow is going to recover some of yesterday's losses-- in fact, some of the losses from this week, up almost 2%, 619 points. S&P 500 will settle up almost at one at 1.5%, up 64 points. NASDAQ up just under 1%, gaining 127 points.

Let's go back to the panel. And, Jack, I want to bring you in on something, because when we read the notes and the comments you share with your clients, there was something you said that made me think, yep, this makes a ton of sense, which is that for all of our fear of Omicron or Delta and the COVID variants, they actually buy time in economies that might be overheating. Can you help us understand from an investor what that means and how that might play out in markets?

JACK MANLEY: Yeah, absolutely. And, Adam, I'm glad I make sense some of the time. That's always good to hear. When we think about the potential for Omicron, and it very much is a potential story-- as Randy said, there is so much uncertainty out there still-- what I do think is helpful is dialing back the clock just a few months and remembering what the economy went through because of Delta.

We didn't drip back into a recession, right? The economy did not end up rewinding any of the gains that it had made in the first half of this year. Rather, growth slowed down a little bit, because we were just unable to resume normalcy at the pace that we had initially begun that resumption at.

I think there is a similar potential side effect, so to speak, from Omicron-- which is to say that if we were expecting well above trend growth in, say, the fourth quarter of this year through the first quarter of next year, maybe growth remains above trend but is just a little bit calmer than what we would have otherwise expected. And if that's the case, well, then, it stretches out the length of the recovery.

Think about how strong inflation's been over the last several months. Think about how much stronger it would have been if things had been completely back to normal in June, if Delta had never come around-- I think a similar story here to tell with Omicron.

JARED BLIKRE: And, Randy, I just want to follow up on one of your comments that you gave before the bell, and that's volatility. It is definitely here. We don't know when it will subside, but I'm just wondering how should investors be thinking about the current market environment and the way to position themselves the best.

RANDY FREDERICK: Well, again, keep in mind, volatility is a measure of movement, not a measure of movement in a particular direction. So again, we're going to have big up days, we're going to have big down days, we're going to have days like yesterday, which were staggering, where you have a huge move in one direction and then it changes direction the other.

I would not be surprised to see a few more of those things. This market is going to pivot on a day-to-day or even intraday basis based on the news that comes out. I agree with most everything what Jack said-- there are some positives to this. Certainly, look at the price of crude oil. That's going to come down at the gas pump.

It takes about two weeks, maybe, at the most, before lower crude prices bring down the price of gasoline. That's a good thing. But volatility is definitely going to be here for a while. And it's not just because of the Omicron variant.

Volatility was already on its way up before this news broke. And the reason for that were a couple of other things that were going on that aren't maybe getting as much attention, one of which is, of course, the government could shut down on Friday. Now, historically, that has not been a big deal, and I know there's talk of a deal maybe in the works right now. But I don't think it's completely done.

The last four or five shutdowns we've had, the market's actually been higher. But as you go into that shutdown, people get a little nervous, volatility goes up. The other one, which is a bigger issue, by far, is the debt ceiling issue. It was punted, as you remember, a month ago out into mid-December. Now, that's kind of a bit of a floating date, as Janet Yellen talks about.

But at some point in the month of December, if they don't raise the debt ceiling, the government will not be able to pay its bills. No one expects that to happen, but if you look at what's happened historically, the markets have gotten very volatile. And I believe those two issues, more so than the Omicron because that just happened on Friday, those were the reasons why volatility was already on its way up before it had that big spike. Now you combine the Omicron on top of that, which creates another level of uncertainty, you've got a lot of reasons for things to say volatile here for at least the next two to three weeks.

ADAM SHAPIRO: Randy, you managed to use the debt ceiling and funding in one sentence, which I think the teenagers would say is a definite buzzkill. But in all seriousness, we've got the FOMC next week. And Jack has pointed out that what we're witnessing with the volatility and what potentially could happen if potentially-- that's the problem with all of this-- if, if, if, right? But, Jack, the Fed-- are the hands of the Fed tied if Omicron becomes far more severe?

JACK MANLEY: So I think what the Fed has done actually-- and the timing of this is sort of fortuitous-- is in the minutes we got last week, in the testimony we heard from Jay Powell, it seems like the Fed may be accelerating the timetable for tapering-- maybe. Again, it's an if, right? We don't know exactly that this is going to happen. But I think there was some concern around that conversation because some people looked at that as an implication that interest rates would start to move higher sooner rather than later.

I think we need to divorce these two things and remember that when the Fed is tapering, it is not the same thing as raising interest rates. And in fact, if the Fed does wind down its tapering schedule ahead of what it has promised us, it's just giving us a little bit more-- or giving them, I should say, a little bit more cushion than they would have had otherwise when it comes to timing out those rate hikes.

You know, if inflation stays around and accelerates as a result of Omicron, well, now the Fed has more leeway. If inflation actually goes away as a result of Omicron, again, the Fed has more leeway. I think they have positioned themselves fairly nicely to have that flexibility when it comes to monetary policy, particularly in the back half of next year.

ADAM SHAPIRO: Randy-- Jack, thank you, and, Randy, I want to correct something-- I keep saying Fed next week. But you know, we're all working from home, I'm losing time with spatial relations-- it's the 14th and 15th. But nonetheless, you know, a lot of investors right now are listening to us and they're listening to the guests who come on the program talking about the potential for-- we're going to finish the year out all things most likely positive.

The S&P is going to be probably, what, 20%, 24% depending what happens this month-- but it's next year. And the Fed's decision on the 14th and 15th of this month is going to impact setting us up for 2022. What, Randy, do you think they could get wrong?

RANDY FREDERICK: Well, I agree with Jack again on this point. And I think this is a very important thing-- tapering is not tightening. We keep saying that. There's no reason the Fed has to either be in tightening or tapering. They don't have to be in easing or tightening mode all at the same-- one or the other. They can just be in neutral mode.

And it's been my belief all along, and I don't believe Omicron changes that at all, that this tapering process is going to take somewhere between maybe four and seven months. They can, again, adjust that up or down, forward or back based on what the data is telling them in the meantime, because that's still another six, seven months out. And then they're likely to not do anything for several months.

In fact, the last time the Fed went through a tapering process, if you remember, they waited an entire year before they actually started the first rate hike. And, frankly, I think that's exactly what we're going to see this time. This tapering could end anywhere, again, like I said, maybe may, June, July, August, or something like that.

We're probably not going to see a rate hike until the very end of Q3, maybe even not until early Q4. And of course, all that can change between now and then because we're going to get enormous amounts of data, we're going to have lots of inflation metrics, employment metrics, you name it. But that's the current thinking, and I think the Fed will go into a neutral mode there for a while, which, frankly, would be a good thing. I, and I think everyone else, would love to see the market just move on fundamentals for once.

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