“It’s déjà vu all over again.” – Yogi Berra
The emergence of the Omicron COVID variant has Wall Street on edge just as hopes for normalcy were taking shape. We’ve been watching this movie off and on for the last 22 months, and we’re all more than tired of it. Some of us have gotten COVID despite all precautions (my wife and I are thankfully feeling much better now). Many others are still taking an anti-vaccination stance which endangers themselves and unwitting others. The politicization of the virus has not ceased. How many folks in a supposedly educated country can continue to take stances against science amazes me, but that’s where we sit in the face of a new danger.
November was rolling along nicely for equities until the day after Thanksgiving. Panic ensued on a day where few humans were working. Machine algorithms ruled the trading and stocks got crushed. The VIX, or Volatility Index, rose over 55% on Friday to a level rarely seen in 2021. There was a slight bounce on Monday, but the next two days had large reversals. All in all, the month was slightly negative in performance. With that said, we enter December in a different psychological state. People were starting to travel and enjoy themselves. Restaurants were doing well and retailers saw brisk traffic. Will Omicron bring all the positivity to a grinding halt?
It’s obviously too early to tell, but it appears as though Omicron provides some new challenges. The strain developed in an immune-compromised patient and is thought to be able to spread more rapidly than prior mutations. The science community certainly expected this to occur at some point. Companies like Regeneron, Pfizer, Lilly, Johnson & Johnson, Moderna, and Biontech are doing their best to stay ahead of the curve. The vaccines that have been developed have largely been effective. However, many immune-compromised individuals cannot safely be vaccinated. Monoclonal antibody treatments are thought to be far more effective for this section of the population, but which cocktail will be the best against Omicron? When the right solution is found, how quickly will the regulatory authorities approve it for general use?
Today presents more questions than answers. Will supply chain problems be further affected by Omicron? How will inflation react? What will the Federal Reserve do about monetary policy? Will corporate earnings continue to be strong? What should we be doing with our portfolios?
The only thing I can say with any certainty is that we’ve been here before. Friday’s selloff bore little resemblance to the carnage of early 2020. Even though it’s not accepted by everyone, there is the historical evidence that we’ve kept on with life since the beginning of the pandemic. It was unwise to panic in February and March of 2020, and it’s probably unwise to panic now.
If there’s any silver lining to today’s new fact pattern, the flight to safety in Treasuries has driven rates to 1.42% on the ten-year note. That’s a far cry from over 1.7% two weeks ago. The perceived “hideout” in Treasuries isn’t paying much more than cash savings. Another plus is that the price of crude oil has declined from the mid-$80’s/barrel to under $66 today. This drop should eventually lead to less expensive gas at the pumps.
The bottom line is that COVID seems to be with us for the long haul. It’s possible that unlike polio and smallpox, it will not be fully eradicated. It may be analogous to HIV which has been relatively contained in the developed world. Some behaviors had to change at the apex of AIDS, and the way we live may continue to be affected by COVID. It doesn’t mean that life will stop. The pent-up demand for creature comforts and entertainment will not abate.
If you believe that science will control COVID, then it makes sense to stay long-term from an investment perspective. We’ve already seen that earnings have remained strong in the face of the pandemic. Cheap money makes borrowing more affordable. Even though cash and Treasuries are safe havens from volatility, any return is gutted by inflation. Yes, we’re looking at more potential instability depending on the Omicron news flow, but optimism should re-surface once science provides solutions to this strain. The roadmap for equities has many new potholes, but we’ve read the playbook. Try to stay focused on the facts and what they portend for the future.
In next month’s installment, we’ll review our predictions for 2021 and consult the old crystal ball for 2022. I hope that you have a safe and happy holiday season. Stay well and take care. I look forward to talking with you soon. Please let me know if you have any questions or comments.
The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.
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