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Tuesday, November 30, 2021
Investors are less spooked by the virus than officials' reaction to it
Out of nowhere last week, the Omicron variant of COVID-19 appeared out of nowhere to sow fear, confusion — and lots of red ink on Wall Street.
As the World Health Organization’s director general so eloquently phrased it, the mutation’s big debut showed us that the virus is “not done with us” — even if we desperately want to be done with it.
In the intervening days, a number of unanswered questions have been raised about how seriously Omicron afflicts (pretty mildly, according to initial reports), whether vaccines will still be effective (no definitive answer yet, but Moderna has already promised a bespoke version of its vaccine by early 2022), and perhaps most importantly, how rapidly it spreads (the most worrisome concern, and by all indications a legitimate one).
At a minimum, and depending on the variant’s severity, its appearance suggests the Federal Reserve may alter its plans to taper its stimulus — or at least push back a rate hike campaign that’s expected to begin sometime next year.
For markets, however, there’s one fulcrum on which all of the unknown variables rest. That is, would an Omicron-driven outbreak lead to more lockdowns?
It bears mentioning that the market’s stunning recovery from the bear market of 2020 kept chugging along during the summer, when the Delta variant’s rise threatened to roll back progress made since the mass vaccination campaign got underway.
That makes Friday’s sell-off, driven as it was by thin liquidity, significant in that it highlights a fear that’s been percolating since Australia and parts of Europe opted for new restrictions in the face of soaring infections driven by the Delta variant.
And it underscores why stocks reacted favorably to Monday’s reassurances by President Joe Biden that new lockdowns were not in the cards (at least for the moment) — the correct approach, given the mix of treatments and vaccines that have gotten the world through the worst of the pandemic.
However, Omicron may yet “trigger growth downgrades, worsen risk sentiment and have significant sectoral impact. We are concerned about the human toll and expect renewed restrictions on activity,” BlackRock warned in a note on Monday.
“We still favor equities for now, but would change our stance if vaccines or treatments were to prove futile. If they are effective, the strain only delays the restart of economic activity, and we would lean against any stock market pullbacks,” the investment giant added.
That qualified bullishness is why a new Deutsche Bank poll found that a slim 10% of financial market players think the new variant will be a “significant event,” with 60% thinking it will only have a moderate impact and 30% thinking it’ll be a complete non-factor.
“As such, it's probably clear that markets are probably not set up for bad news on this front. So, negative Omicron news is likely to be bad for markets without huge additional stimulus,” according to Jim Reid, Deutsche’s chief economist. It also reinforces what Goldman Sachs called the market’s “textbook ‘COVID-on’" response to the Omicron news, which was to sell-off.
All of which brings us back to the subject of Europe, the frontline in COVID’s early days and now that Omicron has surfaced as a concern. While we won’t know for certain whether the new strain is a real threat for at least a few weeks, “policymakers will not have the luxury of a wait-and-see attitude,” Eurasia Group warned on Monday.
With global travel restrictions flying fast and furiously, the continent “will be the epicenter in the debate over broader limits on activity, with Germany and France among countries facing calls to widen restrictions and boost fiscal stimulus in a downside scenario; given polarized politics, state and local governments in the U.S. are unlikely to significantly change policies absent a serious new outbreak,” the firm added.
The words “absent a serious new outbreak” are critical, given how quickly the Big Apple went from a handful of isolated cases to a full-fledged global epicenter in the spring of 2020.
The return of lockdowns is being debated “sotto voce” style in market action, and hints about a locked-down future will likely make investors jumpy. Already in New York City — where infections have been on the rise ahead of the cold-weather months — the city’s health chief is advocating for the return of indoor mask requirements. According to Bloomberg:
‘The health advisory stops short of a mandate but signifies officials’ trepidation of a new COVID-19 wave as the Omicron variant spreads around the world and New York sees an increase in post-Thanksgiving COVID cases.”
Should Omicron obtain a toehold in the city or state, it’s not hard to imagine that more stringent measures — i.e. capacity limitations, social distancing and of course, the potential shuttering of indoor dining, as city officials did last fall — could be in the offing. The distance between “strongly recommending” a course of action, and full-fledged mandate, may be shorter than some think.
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