New coronavirus variant discovered and considered to be a “variant of concern.”
This variant potentially has ramifications to both the supply and demand sides of the global economy.
While more data around this variant will likely become available over the coming weeks, it adds another market risk.
Last Friday, concerns over a new COVID-19 variant drove widespread de-risking across global financial markets. The World Health Organization (WHO) warned that a new variant discovered in South Africa has been reported on several continents. WHO named the new variant “Omicron,” and has labeled it a “variant of concern,” the most serious category the organization uses for such tracking. Though there is nothing definitive about whether this variant is more transmissible or deadly than other coronavirus variants, news of it and the potential impact on the global economy hurt financial markets. Not surprisingly, economically sensitive, cyclical sectors and commodities, like value stocks, copper, and oil, struggled relative to more defensive parts of the market. Safe-haven investments, such as U.S. Treasury bonds and gold, were the beneficiaries. Whether the Omicron variant leads to another health crisis or ends up being nothing to worry about, near-term economic uncertainty and subsequent market concerns will linger, especially with limited policy responses and valuations so high.
One of the most fundamental concepts of economics is the interaction of supply and demand. Disruptions to either can cause an imbalance and have economic ramifications and, as we have seen with past variants, Omicron could affect both. On the supply side, if this variant proves to be vaccine resistant and highly transmissible, it could further exacerbate existing supply chain problems if some form of lockdowns are implemented, especially in Asia where generally a zero-COVID policy exists. On the demand side, Omicron-triggered lockdowns, travel bans, and reversal of recent work-from-office corporate policies could all damage consumer spending.
While there are still so many questions about this new variant, a major concern is the potential for another health crisis and U.S. policy response would be somewhat limited this time. On the monetary policy front, short-term interest rates are already near zero and therefore hamper any attempt of the Federal Reserve (Fed) to stage a similar economic rescue like we witnessed in March of 2020. A positive from this new uncertainty is that, the Fed is unlikely to announce any acceleration in its tapering plan at its next FOMC meeting, which investors had recently speculated might occur. Also, there has been a drop in interest rates expectations as investors have pushed out the next Fed rate hike to later in 2022. On the fiscal front, with members of both political parties concerned about the inflationary result of additional stimulus and debt to GDP levels already at World War II levels, the path to more fiscal support is much more difficult than we witnessed in March of 2020.
The economic impact of the Omicron variant is a new concern for the financial markets. News of this variant surfaced last week, and we expect more data around its transmissibility to be available in the coming weeks. The good news is that, relative to March of 2020, vaccines are available, treatments are better, and there is less political will to implement full-scale lockdowns. Furthermore, vaccine-makers have suggested that current vaccines could be reformulated in about 100 days to address this new variant. On the other hand, the bad news is the Omicron adds another worry to financial markets on top of peak economic growth and rising inflation, all while monetary and fiscal policy responses may be somewhat limited. Combining this uncertainty with high market valuations suggests that stock market volatility will likely intensify. We maintain that diversification is the key in this market. In these times, your financial professional can help you stay focused on your long-term risk and return goals and help you with your personalized investment objectives.
This report is created by Cetera Investment Management LLC. For more insights and information from the team, follow @CeteraIM on Twitter.
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