With vaccines worldwide helping governments get a modicum of control over the pandemic, the last thing needed (but always a possibility) was the discovery of a new variant with higher transmissibility, higher virulence and better able to escape the protection afforded by vaccines or previous infection. Of course, we are nowhere near discovering that with Omicron in these early days. Still, a heavy diet of sensationalist media headlines will undoubtedly encourage some panic among pandemic-weary populations.
Global markets took a heavy fall on Friday, and we are expecting to see that further spill over into today’s trading, but much more information is needed to know where markets are headed. The good news is that we have a playbook to guide our decision-making: the 2020 stock market. The hope is, and early anecdotal evidence supports that this may ultimately be the case, that Omicron isn’t going to be as bad as feared, and that vaccines will continue to offer significant protection and eliminate the possibility of global lockdowns.
However, if over the next few weeks we discover the opposite, and populations are faced with a significant threat while we await Omicron-targeted vaccines from Pfizer and Moderna (expected to be up to six months after development, manufacturing, and regulatory approvals), then what can we expect? Indeed, the characteristics of the 2020 pandemic response are likely:
- Continued quantitative easing, unwinding the recent moves to taper
- Interest rate rises likely pushed out
- Fiscal stimulus to support people as they are unable to work
- Inflationary pressures easing significantly, although supply chain bottlenecks will persist
- Likely rotation back into the pandemic winners (such as stay-at-home stocks like Domino’s [DMP] and e-commerce companies) and out of the recovery stocks like the financials and travel sectors
- Return to favour of long-term growth stocks at the expense of value stocks as long-term yields drop
What is interesting from the immediate response is that the sell-off has been so broad-based despite the knowledge of the above. That is probably because markets are so much higher than pre-pandemic (in the US at least), so markets were vulnerable to correction even in the absence of an event like Omicron. But it will be essential to remember 2020 as volatility starts to take its toll and causes investors to second-guess the prospects for their long-term investment portfolios.
