OMICRON IS WREAKING HAVOC ON THE WORLD. INVESTORS ARE THE ONLY ONES NOT WORRIED. / BARRON´S MAGAZINE

Omicron Is Wreaking Havoc on the World. Investors Are the Only Ones Not Worried.

By Nicholas Jasinski 

People in line at a Covid-19 testing site in Washington, D.C. Pedro Ugarte/AFP/Getty Images

The Omicron variant of the coronavirus has rapidly become the dominant strain in the U.S. and abroad, and has helped to push daily new cases to pandemic records in several states and countries. 

The stock market has taken an emotionless view of it all, with a hardly interrupted Santa Claus rally that pushed the S&P 500 index to an all-time high close on Thursday.

This isn’t March 2020, when Covid began spreading through the U.S., and the outlook for markets won’t resemble that “sell first, ask questions later” episode. 

Federal Reserve policy and the path of corporate earnings will determine stock performance in 2022, not the latest chapter in the Covid-19 pandemic. Investors shouldn’t panic.

Early observations from South Africa and the United Kingdom suggest that although the Omicron variant is more transmissible than earlier strains, it doesn’t appear to be sending as many infected people to the hospital with severe cases. 

Other data suggest that’s especially true for those who have completed their initial doses and boosters of mRNA-based vaccines.

For stock investors, daily new case counts matter to the extent that they spur governments to impose economically harmful restrictions on movement and in-person activities, which in turn hurt corporate earnings. 

But if Omicron cases grow rapidly without a proportionate jump in hospitalizations and deaths, then the early 2020-style shutdown scenarios should be avoided.

The Food and Drug Administration’s emergency–use authorization this past week of highly effective oral treatments for Covid-19 from Pfizer (ticker: PFE) and Merck (MRK) are further reasons for optimism that Omicron won’t be as deadly as prior waves.

Nonetheless, Omicron may still inspire changes in consumer and business behavior without official restrictions. 

Travel plans, large events, in-person shopping, and holiday family gatherings are being canceled or postponed. That will show up in monthly economic data and may be felt by airlines, retailers, and other affected industries.

But investors shouldn’t overreact by selling out of those stocks, either. 

Each wave of the pandemic has brought temporary disruptions for the most in-person businesses, followed by a rapid recovery on the other side.

“One lesson of the past two years is that the rebound is very, very powerful and quick,” says Charles Lemonides, chief investment officer of the New York–based hedge fund ValueWorks. 

“These companies have already shown more than once that they’re going to survive.”

And the recovery on the other side can be potent. 

“Another lesson is that stuff doesn’t simply come back to the base level. 

Pent-up demand just torques the upside to overshoot the base level,” Lemonides says. 

“I think it’s silly to shy away from these companies today because you think they’ll trade lower if we go into the most negative lockdown scenario, because you’ll miss that bounce.”

Shares of potentially affected companies, including United Airlines Holdings (UAL), Carnival (CCL), Hilton Worldwide Holdings (HLT), Live Nation Entertainment (LYV), and Cinemark Holdings (CNK), have already retraced most if not all of their losses since Omicron began to make headlines in the last week of November. 

The same goes for oil and several other commodities whose prices were whipsawed in recent weeks. 

Those assets will remain sensitive to daily headlines about the variant—especially during the low trading-volume days around the holidays—but investors with a time horizon beyond a few months should look past the current wave.

Demand for Covid testing surged this past week. Above, a drive-through site at Tropical Park in Miami. / Chandan Khanna/AFP/Getty Images

A new batch of earnings reports could help investors refocus their attention away from Omicron, as well. 

Analysts are currently forecasting 21% earnings growth from the S&P 500 for the fourth quarter. 

If recent patterns hold, the numbers could come in a good bit higher, boosting markets in the process. 

The banks informally kick off fourth-quarter earnings season in a few weeks, with JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) scheduled to report on Jan. 14. 

The numbers will also help investors quantify one month of Omicron impact, with management teams able to offer additional insights on earnings calls.

But most important for stocks and bonds will be shifting Federal Reserve policy. 

The higher target interest rates expected next year will drag down bond prices and put pressure on stock multiples, regardless of Omicron. 

The U.S. central bank is in the process of winding down its monthly asset purchases—it is on track to finish by March—and officials have penciled in three quarter-point interest-rate increases for 2022. 

Monetary policy is set to get tighter, reflecting the Fed’s greater focus on getting decades-high inflation under control. 

To be sure, Omicron could still have an influence on officials’ thinking.

“The labor-market recovery is likely to be impacted by the Omicron variant,” says Edward Moya, senior market analyst, the Americas, at currency brokerage Oanda. 

“I think the school closures in particular will keep many parents from fully returning to the workforce because they have their children back at home.”

The U.S. labor-force participation rate remained nearly two percentage points below its prepandemic levels in November, with an unemployment rate of 4.2% and millions more job openings than workers looking for employment. 

Omicron probably will delay a further labor-market recovery for a month or two, and could add to wage inflation in the meantime.

Companies across industries have cited difficulties finding workers in recent quarters, and many have had to boost wages to fill positions.

Omicron could also add to the near-term inflationary pressures caused by overloaded supply chains across the globe, according to Jake Schurmeier, a portfolio manager at Harbor Capital Advisors.

Infections among workers at ports and other transportation infrastructure have limited capacity throughout the pandemic. 

Plus, consumers who have to stay home could continue their elevated spending on goods relative to services, further straining supply chains. 

Those forces could push up costs and prices as a result, accelerating inflation in the next few months.

“At the margin, more goods consumption and lower labor-force participation is likely to provide a modest boost to inflation in the near term,” says Schurmeier, who was previously the head of Treasury market analysis within the markets group at the Federal Reserve Bank of New York. 

“But we still expect inflation to peak in the first quarter [of 2022], and we don’t expect Omicron to meaningfully affect the trajectory.”

Overall, Omicron’s potential inflation-boosting impact marginally increases the risk of a more hawkish Fed. 

The devil will lie in the details from now to the Federal Open Market Committee’s next meetings in late January and mid March. 

By the March meeting, there will be an abundance of real-world data on the Omicron variant, three more months of employment and inflation readings, and a plethora of anecdotal information about Omicron’s effect on the economy.

“It’s very difficult to say what the economic effects would be,” Fed Chairman Jerome Powell said at his post–Federal Open Market Committee meeting news conference on Dec. 15. 

“I do think wave upon wave, people are learning to live with this….It doesn’t mean it won’t have an economic effect; Delta had an effect of slowing down hiring.…I just think at this point, we don’t know much.”

What is certain is that Covid-19 is no longer the destructive black swan event for markets that it was in 2020. 

A bad quarter may be in store for the most in-person-sensitive businesses, but it won’t be enough to alter their long-term prospects. 

A temporary boost to existing inflationary pressures could spur the Fed to tighten marginally more forcefully, but the direction of monetary policy in 2022 remains the same. 

And that’s likely to mean more to investors than what we all hope is one last Covid wave.