The Independent Market Observer

Will Omicron Lead to More Market Volatility?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Nov 30, 2021 3:15:28 PM

and tagged Commentary

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omicronOnce again, we have some volatility in the financial markets. With the appearance of the Omicron variant of the COVID virus, stocks have pulled back. This has caused all sorts of speculation about the resurgence of the pandemic, the derailing of the economy, and more significant downturns in the market. It’s time for a deep breath, as always, and a determination of what is—not what could or might be—happening.

First, the Markets

Looking at the S&P 500 as I write this on Tuesday afternoon, we have a drop of less than 3 percent from the all-time high of a couple of weeks ago. As market downturns go, this doesn’t even qualify. There have been many days where the market dropped more than it has in the past two weeks. What we see here is simply normal volatility.

In fact, if we look back at the past six months, we saw a month-long drop of more than 5 percent in September, a 3 percent drop in one week in July, and many smaller drops during that time period. So far, at least, this is a normal drawdown, one we see multiple times in a year.

Are Things Different This Time?

But this is different, of course. This time we have the Omicron variant. But last summer, we had the Delta variant, which drove another wave of infections. And with periodic pullbacks, some of which are listed above, the market still rose even as the infection wave rose. The economy also did well during that time, with strong job growth and business spending. The economy was strong enough to survive the rise of the Delta wave—and it is likely strong enough to weather Omicron as well.

This is especially true at the moment. First, we don’t actually know much about the variant yet. Second, the winter wave of the Delta variant may be rolling over faster than expected. While we can’t rely on that—Thanksgiving last year showed a drop in case growth that reversed—it is at least a hopeful sign, as is the fact that positive testing rates have also rolled over. The risks from Omicron are real. But as Delta showed us, the economy is much more resilient now than it was in earlier waves.

Unexpected Effects

In fact, the Omicron variant could have unexpected effects that support the economy and the markets. Energy prices are down, which should help pull inflation down. With lower inflation likely and with worries about the recovery, the Fed may pause in tightening monetary policy, which seems to be showing up in markets as interest rates have pulled back in recent days. Easier policy and lower rates will likely act to support markets, which will offset any economic damage Omicron does.

And while the risk of that damage is real, here too, there are offsetting factors. Vaccines for this variant, if needed, will come much faster this time. Existing vaccines and exposures will likely provide some protection. With medical risks likely constrained by these factors, there will likely be no or minimal need for lockdowns, which means the economic damage will also be constrained.

Now, Back to the News

To go back to the news, lots of things could happen. But so far at least, there are no real signs of the worst outcomes. And that seems to be what the market is pricing in: some risks, some damage, but not the end of the world. Markets are supposed to do exactly what appears to be happening here. That they are doing just that is a good sign.

Could there be more damage? Of course. Will we see more volatility? Very likely. But, again, this is normal and to be expected. Unless and until the actual events get worse, we need to pay attention, but not to worry. Remain calm and carry on.

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