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How Is The Omicron Strain Expected To Impact Markets?

Pinchas Cohen | Monday 29 November 2021

U.S. index futures rebounded with European stocks Monday morning after American and global stocks underwent a big sell-off on Friday. The advance may be attributed to the new view that Friday’s sharp selloffs might have been due to overexaggerated fears. Fresh reports are suggesting that the new coronavirus strain is not as dangerous as initially anticipated, and less so than the already familiar Delta strain.


A Closer Look at Omicron, the New Virus Variant

A new COVID-19 strain, classified as Omicron (B.1.1.529), which was first identified in South Africa, was described last Thursday as the worst variant observed since the beginning of the pandemic. Epidemiologists have been concerned that a vaccine-resistant COVID-19 mutation may develop; Dr. Mark Dybul, an immunologist at Georgetown University Medical Center’s Department of Medicine, believes he knows when this vaccine-resistant strain will arrive. On November 16th he said he expects such a shot-immune coronavirus variant by spring 2022. 

A question that was highlighted in the news is whether the Omicron strain will resist current vaccines, the development of which required time and trials. President Joe Biden’s chief medical adviser Anthony Fauci said on “Meet The Press” on November 28 that the new variant “might evade immunity protection.”

Friday’s Significant Decline

U.S equity benchmarks experienced sharp declines on Friday due to concerns and uncertainty about the new virus strain. The S&P 500 (USA500) fell 2.2%. It was the benchmark’s steepest drop on a percentage basis in nine months.  Moreover, the S&P 500 experienced the sharpest selloff on record on the day after Thanksgiving. 

However, the stocks that are sensitive to the economic cycle went through the sharpest declines. The oldest stock index on Wall Street, the Dow Jones (USA 30) hosts blue-chip stocks. These value stocks tend to do better during an economic expansion and underperform at other times. Mega-caps shed 905 points on Friday, or 2.5% of their value, the sharpest fall since October 2020. 

The Russell 2000 (USA 2000) , whose small caps are typically cyclical stocks and generally provide superior performance amid a strong and expanding economy,  fell the most among US gauges, declining 3.6%

On the other hand, Nasdaq 100 (US-TECH 100) listed companies tend to perform better when the economy is not coming out of a recession. Technology stocks performed especially well when consumers and businesses were forced to use their products when stuck at home during lockdowns.  Therefore, the Nasdaq 100 declined by only 2.09% on Friday, outperforming relative to peer benchmarks. 

The Europe 50 (FESX) benchmark dropped 4% on Friday, more than a six-week low.

Was Friday’s Move Overdone?

Oil (CL) was up 4.8% at the time of writing, recouping some of the 12% decline on Friday.  This was U.S. Oil’s worst drop since April 2020, at the height of the pandemic.  Investors may have been concerned that Omicron would lower the demand for Oil as social restrictions limit travel. 

If the reports on November 28 that the new variant is less dangerous than the known Delta mutation are found to be true, investors may return to drive stock prices higher. Bill Ackman, the founder of Pershing Square Capital Management, says if Omicron’s symptoms turn out to be mild, it could prove bullish for stocks. Presumably, the market would be especially bullish for Oil, the significant decline of which came only due to fears of restricted travel. 

However, the World Health Organization said on Monday that the new strain will probably spread across countries and pose a “very high” global infection risk with potentially “severe consequences” in some places. If that outlook turns out to be correct, it’s plausible that we will see more of the same market action we saw on Friday.

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