The Omicron variant of Covid-19 may feel scary, but it isn’t actually all that bad for stocks. Despite its plunge at the end of last week, the market has already implied as much.
Dow Jones Industrial Average,
all fell more than 2% Friday in response to news of the variant—a strain with a large number of mutations, which suggest it could infect people faster and in different ways. Investors seemed to panic, given the threat that travel restrictions, and even lockdowns, could harm the global economic recovery.
Some countries have already blocked travel from southern Africa, where the new variant was discovered, while Israel has closed its borders to foreign visitors. Even before Friday’s news, cases of Covid-19 were surging in Europe, prompting Austria to impose a lockdown.
Yet Friday’s stock-market moves seem to have been a temporary freak-out, rather than the start of a longer decline.
The first positive fact to consider is that some of Friday’s losses resulted from poor market liquidity in a shortened trading session. The negative Covid-19 news prompted some market participants to sell shares, but those sellers struggled to find buyers with many people gone for a four-day Thanksgiving weekend.
The number of shares in the SPDR S&P 500 ETF Trust (ticker:
) that changed hands on Friday was 59 million, according to FactSet. That was down from the roughly 70 million seen in the prior trading days, and some 39% of the peak of 150 million for the second half of 2021.
“Liquidity was relatively limited during a time of stress, seemingly exacerbating the slide,” wrote Christopher Harvey, chief equity strategist at Wells Fargo.
Low volume also means that Friday’s losses don’t necessarily indicate that demand for shares will be weak going forward. With so many market participants on the sidelines, one can’t assume that those absent participants would have also been sellers. “With more investors returning from the holiday, the market can better discount the severity of the news,” wrote JJ Kinahan, chief market strategist at TD Ameritrade.
Right on cue, buyers came out in full force Monday, the second encouraging sign for stocks. The Nasdaq rose just over 2% to reclaim its level before Friday’s sell-off, while the Dow and S&P 500 gained 0.9% and 1.5%, respectively.
The sizable move higher sent the S&P 500 to a level that indicates investors are confident in the market. The index was trading at 4,665, almost 3% above its 50-day moving average of 4,530, confirming that investors largely believe the stock market can remain on an upward path.
That buying action is in direct response to the third positive signal: The Covid variant may not do much economic damage.
Pfizer (PFE) said over the weekend that it can quickly adapt its vaccine to address the Omicron variant. Moderna (MRNA) said it could roll out a reformulated vaccine by early 2022. That means countries are more likely to continue reopening, keeping the economy growing.
None of this means the new variant isn’t a concern — it is. It’s just that the market is signaling confidence that the news isn’t as bad as it could be.
Write to Jacob Sonenshine at [email protected]