Omicron Update #2: What Does The Latest Variant Mean For Financial Markets?

It is rare for us to go back-to-back on a topic but the Omicron variant likely qualifies as an exception.

Another week has brought a furious amount of attention to the critical questions of:

  • How transmissible?

  • And how deadly?

This particular variant of the coronavirus is proving to be.

It has only been a few weeks and so there is still a lot of uncertainty and furious research and debate into what little hard data does exist.

But we are getting somewhere:

The additional data leaves us with two broad takeaways:

  1. All the available evidence suggest that Omicron is very transmissible but, mercifully, not very deadly.

  2. It isn't even clear that this variant will necessarily supplant Delta. Gauteng, South Africa has peaked with case levels similar to Delta, but with deaths expected to be 25 times lower.

See here:

And especially here:

The pale blue dots clustering below the darker blue dots suggests that something has changed. Omicron has been around long enough in South Africa to give more credence to the hope that it will be a less deadly pathogen.

If true, this is GREAT news and not just for stock markets. It would mean far fewer deaths and we can still hope that the Omicron variant would quickly supplant the more Delta wave.

There are still questions and uncertainties, even about the above data but the question is increasingly becoming whether we can live in a world with this version of the virus and

When it comes to financial markets is it time to buy airlines and leisure stocks?

These moves seems pretty exaggerated.

Or small caps and sell growth?

Small caps have given up ALL of their outperformance since the infamous "Vaccine Monday" in late 2020.

Could this trend be about to reverse?

The diminishment of the fears around Omicron and Covid more generally continue to abate could be about to combine with a shift from the US Federal Reserve to higher interest rates. Could this be what finally leads to US large cap underperformance and the return of these beaten down sectors?

And the greatest risk about Omicron? It might be fear itself. If policymakers and health officials continue to introduce lockdowns and other restrictive measures then the milder version of the disease won't matter much and it will also add to voters "pandemic fatigue" for little reason.

It would be a pity if this variant made us less prepared to pay attention if - tragically - a worse variant comes along.

For now however, Jay Powell and the Federal Reserve meet this week and it seems likely they will signal a faster pace of tapering asset purchases and trying to corral inflation.....


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