A week full of the same headlines: Markets “X%” on Omicron

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Signs of a sell off or rotation

There is still little reliable information available about the new coronavirus strain, and uncertainty continues to reign. In other words, for the next week or so we can expect a lot of headlines of the sort: “Markets X on Omicron”, where only X alternates according to the daily move. Fortunately, this movement is likely to be short lived. Last year we saw a 3- month consolidation pattern, started with Delta variant news and followed with inflation headlines. The one-two punch on investors’ confidence caused the broad markets to trade sideways essentially from Sept 1st to Dec 1st. Since this is our second round of COVID variant worries, I would expect the market consolidation and rotation process to be much faster.

We haven't seen inflation fears materialize in the markets yet. Bond yields have actually gone down, caused by bond prices going up. (see chart) So far we seem to have a purely "risk off" fear trade, moving out of all equity classes and into bonds. Investors have been overreacting to COVID news (both positively and negatively) since the beginning of the pandemic.

The US 10-year yield dropped from its recent peak 1.67% to below 1.5% (see chart). This is surprising in the face of Powell's inflation comments on Tuesday, but not unexpected given the barrage of COVID related news.

BIf investor' COVID anxiety compounds with renewed inflation concerns it could lengthen this recent downturn. Then we could see a consolidation in equities from several weeks to a couple months. Again, investors should remember the lesson of the past 20 months. These COVID related downturns are FAST and the recoveries are even FASTER. That means it is better to remain a disciplined investor, weather out the brief troughs and peaks, rather than trading on emotions. Often emotional trading makes the market-maker firms richer, not the investor.

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