Major stock indices sold off sharply on the holiday-shortened trading session on Friday over concerns about a new Coronavirus strain, named Omicron, that was initially reported in S. Africa and Botswana but is also showing up in parts of Europe and Hong Kong. The S&P 500 fell 2.2% on Friday, wiping out its November gains. Today markets are rebounding, adding back over 1.0% in gains.
While the total number of Omicron cases is still relatively low, the new variant appears to be more transmissible than other strains of the coronavirus and has more mutations of its spike protein that current vaccines target to contain damage to healthy cells. It remains unclear to what extent current vaccines, antivirals and natural immunity will be effective against this new strain. However, Moderna, Pfizer and BioNTech said they will be able to assess the effectiveness of current vaccines in about two weeks after evaluating the initial results from studies on new Omicron cases.
Positively, both Moderna and BioNTech said that if the current vaccines are not effective, a reformulated vaccine could be developed and available in large supply by early-2022. “The remarkable thing about the mRNA vaccines (the platform used by Moderna) is that we can move very fast”, said Paul Burton, Moderna’s Chief Medical Officer. Additionally, reports over the weekend from two S. African health experts said that symptoms of the new strain have so far been mild, requiring limited hospitalizations.
While more time will be needed to better understand the Omicron challenge to the global economy, the news flow that matters for capital markets in the weeks ahead is:
1) The study results of current vaccines on new Omicron cases (due out in two weeks)
2) Further clarity on the timing of reformulated vaccines (if the current vaccines are not effective)
3) The incidence of Omicron hospitalizations and deaths (as new Covid cases have risen recently, deaths have increased at a slower rate suggesting vaccinations and natural immunity are winning the war against the virus)
4) Will global central banks reverse their pre-Omicron plans to reign in their ultra-accommodative policies that have been in place since last spring? (this could support markets until new vaccines are available and travel restrictions lifted)
We will monitor the news flow and data over the weeks ahead, but we also think is important to keeps some facts in perspective. Note the survival rate of Covid:
Source: CDC
From an investment perspective, new surges in Covid cases (due to each new variant) have caused the stock market to pull back (the most recent example was the 6% sell-off in the S&P 500 in September through early-October of this year). Then, when the case count peaks and subsequently declines, markets regain their footing and go back to rally mode. As we mentioned above, it's also encouraging that deaths have not been rising commensurately with each new surge in covid case counts.
Source: WHO
In terms of how we have positioned VGA strategies, we knew the market was short-term overbought before Friday’s sell-off and were expecting a mild pullback of 3-5%. The Omicron news provided the reason for the overdue pullback. If the S&P 500 holds its 50-day moving average at 4528 after a 5% pullback (vs. the 3.4% decline so far from its 11/22 peak), the uptrend would remain intact and we would expect to see limited damage to our objective ‘weight of the evidence’ indicators that guide our investment process. For now, the market is not showing alarming levels of distress and most indices remain in longer-term uptrends. The analogs also continue to suggest a positive finish to the year (see table below).
Source: Bespoke
For now, we are maintaining fully-invested (or bullish) positioning in our strategies, expecting a good finish to the year. However, as always, we will follow our objective indicators and adjust accordingly should the ‘weight of the evidence’ suggest that a more defensive posture is appropriate.
Respectfully,
VGA Investment Team
