Many of us were still enjoying an overdue Thanksgiving gathering when we heard the news of the latest COVID variant, Omicron. Two weeks later, some of us are still trying to figure out how to pronounce the new variant. Nevertheless, the impact on the stock market was swift! The Dow Jones Industrial Average suffered the worst Black Friday sell-off since 1931, dropping 2.53% or 905 points in one day.i However, in the week that followed, President Biden announced that he did not anticipate wide spread lockdown due to Omicron. Rather, the President advocated Americans get vaccinations or booster shots, and he enacted a travel ban from affected countries battling the new variant. This relieved the stock market and the fear-induced sell-off was reversed.
There is still a lot we don’t know about the new Omicron variant. What we do know is Omicron originated in South Africa and was detected early, thanks to their proactive genomic surveillance in response to HIV/AIDS. Omicron is the most mutated COVID-19 virus we’ve seen yet, with many of the mutations focused on the spike protein that help the virus with transmissibility. Scientists will need a few more weeks to study the variant before they have conclusive answers. However, there is indication that there is a higher risk of reinfection for the previously infected with the Omicron variant. There may also be a higher chance of break-through infections for the fully vaccinated, albeit a milder case than if a person was not vaccinated at all.
The original outbreak of COVID-19 resulted in an extraordinary market decline in March 2020. However, since then, medical science has created adult and child vaccines, booster shots, and antiviral drugs to help those who are infected recover at a higher rate of success. Additionally, we know a lot more about the virus. We know how it spreads, we know face masks work, and we know how to manage our exposure to higher risk environments when necessary. This knowledge is power in keeping the economy on track towards recovery.
If Omicron turns out to be similar to the Delta variant, economic recovery should be uninterrupted in areas with moderate to high vaccination rates. That could result in continued labor force strengthening as people return to work, and would begin to ease supply chain management issues that were pervasive in 2021. If the economy remains strong, the Fed will likely continue its plans to taper the bond buying program through June 2022, and the slow transition could provide for low volatility in the stock market.
If Omicron turns out to cause more severe illness, be more virulent, or is more vaccine-resistant than Delta, this may result in short-term public health restrictions. Such interruptions would put pressure on growth as the return to full-employment may be delayed and production may slow. The Fed may take a slower path to raising interest rates with economic sensitivity in mind.
In a worst case scenario, if Omicron is found to be much worse than Delta, a protracted COVID outbreak may lead to a more notable economic disruption. Negative consumer sentiment could lead people to cautiously spend less, leading to reduced GDP or an economic contraction. Continued unemployment may remain high and supply chain issues could worsen. However, drug manufactures are already working on an adapted Omicron vaccine, with hopes of reaching the market within 90 days. Therefore, negative ramifications will hopefully be short-lived.ii
Looking further, the protracted fight against the multi-faceted COVID virus is weighing on the President’s approval ratings. President Biden came into office in 2020 with promises of bringing our country back to normal. However two years later, many are still living adapted lives, travelling less, dealing with higher inflation and low supply on just about everything, and they are generally unhappy.
Biden’s reduced effectiveness may hurt the chances of his Build Back Better plan being passed, or being as comprehensive as originally anticipated. That could result in reduced popularity with Biden’s own Democratic base. Falling short of expectations could have further negative implications on the upcoming mid-term elections, which are notoriously terrible for the sitting President’s political party. Republicans are currently favored to take majority in the House which could have long-term implications on tax and monetary policy for the decade to come.iii
In short – everyone is tired of COVID and looking for change. However, Omicron’s emergence has underscored that Coronavirus appears to be here to stay. Hopefully the COVID virus will evolve to be an annual inconvenience we prepare for like the flu. People may need an annual booster for the new COVID variance, similar to how we prepare for the newest flu strain each winter season. However, we should accept that there will likely be more COVID strains than there are letters in the Greek alphabet.iv Hopefully with this new frame of mind, the economy can temper expectations and day-traders will reduce knee-jerk reactions to the next new COVID variant.
iii Schwab Market Outlook 2021.12.07
iv Bob Veres Inside Information