November 29, 2021

Markets React to New Variant

By Michael McKeown, CFA, CPA - Chief Investment Officer

Markets React to New Variant

Equity markets fell on the half day of trading on the Friday following Thanksgiving. The catalyst was the discovery of the new omicron coronavirus variant in South Africa. The World Health Organization designated it as a “variant of concern” on Friday.

It is early to handicap the effect and range of potential outcomes of omicron on the global economy. After poring over medical and statistical reports, most professionals are categorizing this variant as more mild compared to the delta variant.

On the other hand, it is too early to tell if vaccines will be effective against mutations in this variant. Pharmaceutical companies are ramping up development to combat omicron. Though in hindsight, companies did the same after discovering the beta and delta variants, which proved to be unnecessary given the effectiveness of the vaccine.

The equity market indices fell over 2% on Friday while the VIX Index (Volatility Index), a measure of the market’s expectations of volatility, jumped 40% to above 28. In the past, spikes in the VIX above 25 occurred around declines in the equity market. Often times, this was near the interim low in prices, while at other instances the market had more downside in the near term.

VIX & S&P 500

The bond market rallied as traders priced in less chance of three interest rate hikes in 2022. Bonds helped serve as ballast in this environment, despite many strategists saying there is no place for bonds with rates so low.

Federal Open Market Committee Projections

We will continue to monitor the new variant and how it may change the economic and market outlook.

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