Omicron market meltdown: how worried should investors be?

Analysts expect a choppy few weeks as investors take profits and buy the dips

Traders work at the New York Stock Exchange at the start of trading on Monday following Friday's steep decline in global stocks over fears of the new Omicron Covid-19 variant discovered in South Africa. Getty Images / AFP

Tentative hopes the Covid-19 stock market roller coaster was finally slowing down have been frustrated by the sudden emergence of the highly transmissible Omicron variant.

Global stock markets crashed more than 3 per cent on Friday as a result, with the Dow Jones suffering its largest one-day loss of the year, which made for a very Black Friday indeed.

Travel, hospitality, leisure, entertainment and energy companies were smashed as investors feared new lockdowns.

There were signs of a recovery on Monday as the initial panic subsided, but now investors and analysts (and just about everybody else) are watching and waiting to see exactly what Omicron does next.

Investors had just started to breathe a little more easily when news of the variant broke, David Jones, chief market strategist at Capital.com, says. “With vaccines rolling out and economies opening up, Covid was not at the forefront of investors’ minds, then panic set in.”

We should not overstate the damage, Mr Jones says. “At its close on Friday, the broader S&P500 had only been knocked back to where it was at the end of October, while the Nasdaq stood at a two-week low.”

Shares weren’t the only asset class to crash. Cryptocurrencies fell 8 per cent, led by Bitcoin, which ended Friday more than 20 per cent down from its high of nearly $69,000 on November 10.

Perhaps surprisingly, safe-haven gold failed to take advantage of the stock market rout. The gold price did spike from $1,792 to $1,815 at the start of the equity crash, but ended the day roughly back where it started. In a disappointing year for gold bugs, it now trades almost 6 per cent lower than it did six months ago.

Monday brought news that as well as South Africa and Botswana, the Omicron variant had been found in Belgium, Canada, Australia, the Netherlands, Denmark, the UK, Germany, Italy and the Czech Republic, but not the US.

As well as being more transmissible, the World Health Organisation fears the B.1.1.529 “variant of concern” poses an increased risk of reinfection and could reduce vaccine efficacy.

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The harder markets drop, the stronger they rebound
Fawad Razaqzada, market analyst, Think Markets

Despite that, risk assets such as shares and cryptocurrencies rebounded strongly on Monday in what is a familiar pattern, Fawad Razaqzada, a market analyst at Think Markets, says. “The harder markets drop, the stronger they rebound.”

After outsized, one-directional moves in financial markets, you often see a sharp move in the opposite direction, he says.

“Monday can best be described as correcting some of Friday’s overreaction, where liquidity was thinned by US Thanksgiving celebrations,” he adds.

Investors now need time to work out how serious the new variant is and whether vaccines can help fight it off, Mr Razaqzada says.

“It will take some time – possibly a couple of weeks – to understand this variant better. In the meantime, we can expect elevated levels of volatility as investors take profit and buy the dips here and there. Expect a choppy few weeks.”

Reports the new variant may have traded increased transmissibility for less deadly symptoms have given investors some respite, Joshua Mahony, senior market analyst at online trading platform IG, says. “Yet, the weeks ahead remain fraught with danger as traders will prioritise Omicron updates over most other economic data.”

Investors may also be betting the variant will help stock markets in one respect: by deterring central bankers from increasing interest rates and cutting back on stimulus to curb inflation.

One week ago, markets were pricing in a 60 per cent chance the Bank of England would lead the charge by increasing interest rates at its next meeting on December 16, but that has now fallen to below 40 per cent.

US Treasury 10-year government bond yields fell 5 per cent to 1.479 per cent on Friday for the same reason.

Interest rate expectations have been set back again, Laith Khalaf, head of investment analysis at AJ Bell, says. “The longer term outlook is a very gradual rise from extremely low levels, so cash savers shouldn’t expect a sudden rescue from the inflationary erosion.”

Despite Omicron wobbles, 2021 has still been a strong year for stock market investors, says Jason Hollands, managing director of Bestinvest.

Global equities have returned an impressive 21.4 per cent year-to-date, as measured by the MSCI World Index Total Return. “With just a month to go, most investors will be pleased just to hold on to such gains.”

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The weeks ahead remain fraught with danger as traders will prioritise Omicron updates over most other economic data
Joshua Mahony, senior market analyst, IG

Mr Hollands even holds out the possibility of a so-called Santa rally, as history shows December is a strong month for stock markets.

He analysed 40 years of data and found that global shares delivered positive returns 80 per cent of the time in December, far higher than any other month. “Global equities have delivered an average capital return of 1.68 per cent, rising to 1.85 per cent when reinvested dividends are taken into account.”

This is the highest average return of any month, followed by November and January (with September being the worst).

While there is no guarantee of a repeat, Mr Hollands says this underlines the importance of not panicking and selling up when bad news strikes.

“It’s easy to be swayed by short-term market movements but the most important thing is to focus on your longer-term goals. Whether markets go up, down or move sideways in the coming weeks, over the longer term, equities have consistently beaten cash.”

With interest rates and bond yields so low, investors must continue to embrace equities over the longer run, Mr Hollands adds.

Some will even be taking things further and buying Omicron dips, Mr Jones at Capital.com says. “It would take a sharp rise in cases to spook markets and spark further sell-offs now.”

Governments have acted quickly to introduce new restrictions and this has reassured investors so far, Mr Jones adds. “While we may see more cautious trading in the weeks ahead, for now last Friday it looks like just a particularly vicious one-day sell-off rather than the start of a much deeper correction.”

Reports that Omicron only produces mild to moderate symptoms could end up giving stocks a boost, according to Bill Ackman, founder of Pershing Square Capital Management.

Investors who think the same way might want to dive into travel, leisure, energy and other stocks caught up in the recent sell-off.

As ever, trying to time stock markets in this way is risky.

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Whether markets go up, down or move sideways in the coming weeks, over the longer term, equities have consistently beaten cash
Jason Hollands, managing director, Bestinvest

The best way to survive whatever Covid-19 does next is to create a balanced portfolio covering all the major asset classes, such as shares, bonds, cash, property and commodities, and adjust it to match your risk levels.

That should protect you against most market conditions – with the exception of the end of the world.

Even with Omicron, we don’t seem to have hit that point, yet.

Updated: December 3rd 2021, 4:20 AM