Welcome back everyone.
Just a short video today on the new Omicron variant of covid and how it might impact global
markets.
We saw the first few news stories on Thursday this week – (Thanksgiving in the United
States) that a new Covid variant had been identified in South Africa, and we have since
learned that it has found its way into a number of European countries, Canada and Hong Kong.
There has been a lot of news reporting over the weekend that Friday’s stock market selloff
was the most dramatic “risk-off” day in more than a year.
While this is true, the S&P500 only fell 2.3% and at the time of this recording it is already
recovering – up around 1.6% so far today.
The market is up 26% this year and very close to all time highs.
The fact that a 2.3% down day is seen as being so dramatic tells you more about how calm
the market has been over the last year than anything else.
In fact, when you look at a chart of the S&P500 it is very difficult to even spot the market
sell-off that occurred during the initial Delta variant scare which happened in July
this year.
Now, I don’t know anymore than you do right now about how severe this new variant is from
a health perspective – it is not my area of expertise, but scientists are saying that
it may be more transmissible than the highly infectious Delta variant and they are saying
that it carries mutations that possibly make it resistant to our existing vaccines, so
we will have to see.
The World Health Organization has announced that the global health risk from the new variant
is “very high” and the CEO of vaccine maker Moderna says that it will take weeks
to establish how effective the existing vaccines are against it.
We don’t yet know if this new variant is more or less lethal than the previous covid
variants.
If Omicron does turn out to be vaccine resistant as many fear, it is likely that we once again
see governments persuading people to restrict their movements until a new vaccination is
available which the big pharmaceutical companies are saying might happen quite quickly this
time around.
In July when the Delta variant appeared, investors sold their travel and energy stocks and rotated
into the stocks that had done well during lockdown Moderna was one of the top performers.
Oil prices fell back in July and investors began pricing in fewer future interest rate
hikes.
Within a week or so, markets had mostly recovered.
We saw a similar market reaction this Friday, with oil prices falling by almost $10 per
barrel, Moderna was once again a top performer and investors priced in fewer rate hikes for
2022.
Looking at the Fed Funds futures, the market is predicting a second rate hike in December
of next year rather than November, and sees very little chance of a third hike at all
during the year.
A third rate hike had been almost fully priced in when traders left for the Thanksgiving
holiday.
If the new variant does affect the global economy similarly to the Delta variant, growth
would be expected to be weakened, making it harder to justify tighter monetary policy.
The fed is likely in a much tricker position this time around than they were back in July.
The number of people signing on for unemployment insurance hit just the lowest level in over
50 years in the most recent report, which would normally mean increased vigilance for
inflation – this was much less of a worry back in July.
If we see a return to social distancing, consumer spending once again gets focused on goods
rather than on services, further stressing global supply chains.
Goods inflation, which is already at its highest level in forty years has been much stronger
than inflation for services.
Further pandemic delays and factory stoppages would only make the situation worse and drag
it out longer.
Offsetting that inflationary effect is the sudden drop in energy prices that we saw on
Friday, which could at least initially be deflationary.
So where does all of this lead?
Well, markets are betting against much monetary tightening from the Fed, and another big pandemic
wave would obviously make rate hikes extremely controversial and unpopular.
Inflation is looking like more and more of an issue that another Covid wave might only
exacerbate, making it difficult for the Fed to resist tightening.
Stretched supply chains and labor shortages — which could be worsened by renewed lockdowns
— are the key drivers of inflation.
Central banks have to factor these risks into their already delicately-balanced decisions
on tightening monetary policy.
Another factor that might make a repeat of the Delta market bounce back less likely is
the political situation in the United States.
When the Delta scare occurred in July, many Americans had just received stimulus checks,
and others were still getting Special Federal Unemployment benefits which have since expired.
In the current political environment, it seems less likely that this type of fiscal support
would follow another outbreak.
And truthfully, it will be politically difficult for any government to continue throwing money
at the problem of repeated outbreaks.
If the Democrats in the United States wanted to push through further fiscal support without
any Republican support, they could only do this using budget reconciliation, which can
only be done once per budget proposal.
Reconciliation is already being used for this fiscal year to push through Biden’s “Build
Back Better” bill.
So, should you dump all of your investments because of this news?
Probably not, especially if you are a long-term investor putting money away for your retirement.
When you buy a stock, you have partial ownership in a business and over time you get the kind
of returns associated with business ownership.
While markets do have big sell offs from time to time, long term stock market investments
tend to do better than almost any other investment you can make.
Even if you timed your investments horribly, buying right before the 1987 crash or right
before the credit crunch, in the long run you will have gotten a good return on your
savings.
The key questions right now are how severe the infections of this new variant are and
how effective our existing vaccines and other treatments are in dealing with it.
The medical reality is obviously much more important than the short-term behavior of
markets, so stay safe out there.
If you enjoyed this video, you should watch this one next.
See you later, bye.