Omicron & Markets: Focusing on the Knowns

By: Edward Jones
DEWITT, Mich. - Dec. 7, 2021 - PRLog -- Volatility made a comeback last week, triggered by concerns around the new omicron COVID-19 variant, which the World Health Organization (WHO) labeled as a variant of concern. Commentary from the Fed chair about speeding up tapering also added some fuel to the fire, but the health uncertainty stole the spotlight, a reminder that the path of the virus continues to shape the course of the economic recovery. Acknowledging what we don't know on the epidemiology front, we turn our focus on the knowns on the economic front to gauge potential market outcomes under different scenarios.

Known unknowns: Public health implications
  • Since the omicron-variant discovery was first announced, there has been a lot of headline noise around its transmissibility, severity and ability to escape the vaccines. To curb the spread of this new variant amid fears of a material drop in the effectiveness of current vaccines, many countries have tightened travel restrictions. However, health officials have also suggested that vaccines are still expected to provide some protection, particularly when it comes to severe illness and hospitalizations.
  • Because of the uncertainty, stocks have oscillated between gains and losses, with the S&P 500 moving more than 1% in both directions in each of the last six trading days1. The known unknown is that, as medical professionals have noted, it will probably take a couple of weeks to determine the full impact of the omicron variant, and until then volatility is likely to stay elevated. Outside of recessions, similar spikes in volatility have historically been short-lived and resulted in above-average three-month forward equity returns2. This is why we recommend investors avoid the temptation to abandon long-term strategies based on near-term uncertainties.
Known knowns: Solid economic backdrop & medical advancements

While we don't know how the medical situation will play out, the current state of the economy and scientific developments over the past year give us some degree of confidence that the latest setback will not lead to a repeat of the early-2020 pandemic days.

Source: 1. Bloomberg, 2. FactSet, Edward Jones calculations

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