Home Investing Markets: What to Watch Following the Omicron Drop

Markets: What to Watch Following the Omicron Drop


Capital Markets Perspective brings you what to watch in the markets this week, published in partnership with Great-West Investments.

Week in Review

November 22–28

Just in time for Christmas, the world got its first look at its newest Transformer: Omicron.

If you need a reminder, a Transformer was once the hottest toy any kid could get for the holidays. It wasn’t really because the Transformers were the primary defenders of humanity (long before the Avengers rose to that role, by the way…). Nor was it their awesome names (Optimus, Megatron and so on) or their stunning good looks (they were sleek, Anime-inspired adaptations of robot heroes popularized by Japanese comics, just as that genre gained wide appeal in the US.). No, what instead made Transformers so special was their ability to, well, transform: They started out as toy cars, but when you bent, pried and twisted them in exactly the right way, they became something else – huge robots with just the right mix of mirth and malice on their faces to sufficiently mask their true intent.

And so it is with Omicron. Just like the cars-turned-robots of my childhood, evolutionary forces seem to have bent, twisted and pried the dominant form of COVID into something sufficiently different to get its own, much cooler, name. And on Friday, the World Health Organization issued a bulletin[1] describing a new “variant of concern” that originated in South Africa and is now labeled “Omicron.”

It’s far too early to know what the exact implications of that will be. The WHO’s bulletin hinted that Omicron may spread faster and be more effective at re-transmission than even the lightning-fast Delta variant, but it made no real mention of whether the new form of COVID generates more severe symptoms or represents a bigger challenge than the now-ubiquitous Delta. So far, no cases have been found in the US, and major vaccine producers have announced a renewed war effort to re-tool their vaccines if necessary. Moreover, it’s even possible to argue that Omicron’s increased transmissibility might actually be a good thing in the long run if it successfully displaces other, more clinically challenging variants such as Delta.

So just like all the other, more benign transformers that came before it, you can’t really discern Omicron’s intent by simply staring it in the face.

But markets didn’t wait to pass judgement: they sold off hard during Friday’s shortened post-holiday session, handing the S&P 500 Index its biggest loss since January. Selling was concentrated among sectors with the most to lose if new lockdown measures send economic growth spiraling again, such as energy, financials and industrials, and was even more pronounced among mid- and small-cap stocks (both of which suffered their biggest declines of the year.) The flight-to-safety trade was also on full display beyond stocks, too, with a huge influx of cash into US Treasuries that sent 10- and 2-year yields to their biggest one-day drops this year, while gold finished Friday’s session nearly flat. And if there’s a silver lining to all this, it might be oil’s $10-dollar decline: crude futures fell 13% on Friday, which optimists will say could take some of the steam out of all this inflation we’ve been hearing so much about.

Its notable that market volumes weren’t as depressed as they typically are on the Friday following Thanksgiving[2], partially countering the idea that the market impact of bad news was amplified by all the empty chairs tucked under trading desks across the US as traders slept off their tryptophan hangovers. In a similar vein, the selling was perhaps even more pronounced in Europe, where a full day of trading did little to quiet Omicron angst: the Eurostoxx 50 and the UK’s FTSE 100 each suffered their worst declines of 2021. That disparity could be a response to a realization that the policy response to changing circumstances surrounding COVID has been more diverse (and in some cases more severe,) in Europe than it has been elsewhere.

In some ways, Friday’s freakout is entirely understandable. One thing that investors hate more than bad news is uncertainty, and uncertainty is something that Omicron has buckets of. And a fear of the unknown probably matters even more at this exact moment in time given that asset prices are still arguably swollen from their bout with COVID, just like gas and groceries. That creates an environment where uncertainty is perhaps even worse for market sentiment than a depressive but fully-understood negative.

Whew, okay. The reason we were able to spend so much time riffing about Omicron above is that much of last week’s other news was so un-newsworthy. Other than German Chancellor Angela Merkel’s eerily prescient comment before the Omicron announcement that the COVID situation in her native Germany is even worse than it was during the pandemic’s initial wave,[3] there wasn’t a whole lot to say about last week’s developments and their impact on capital markets.

I suppose it matters that last week’s flash PMIs[4] were a little bit light of expectations, but comments that the deceleration they illustrated so clearly was a result of stressed supply chains and a still disjointed jobs market surprised no one. Ditto for last Wednesday’s income and outlays report, which raised exactly zero eyebrows when it showed incomes rising and government transfers falling (together with the savings rate, as it turns out,) and inflation holding in at eye-watering heights[5]. Those outcomes were so well-known in advance that economists and financial commentators probably could’ve written the BEA’s press release for them.

If there was a (mild) surprise in last week’s data, it was probably the University of Michigan’s final look at consumer sentiment for November[6]. The preliminary release two weeks ago was a big disappointment, with inflation and a perceived lack of a plan to address it causing consumer confidence to dip to a decade low when economists thought it would rise. With inflation data having not really improved much in the interim, expectations were that the UofM’s survey would remain just as depressed when November’s final data were released, but instead the month-end update showed modest improvement. That’s probably a good thing, but the UofM’s index is still 12% below where it was a year ago, and the trend is in the wrong direction. Moreover, Wednesday’s release occurred before Omicron was a thing. It’s hard to imagine consumers reacting to that in a positive way.

So here’s what we’re left with: an economy that is still growing in robust fashion, but also clearly decelerating because of all the well-known issues (i.e. inflation, jobs, policy gridlock,) that we’ve been discussing for what now feels like forever. Now layer on top of that the arrival of a dramatically-named COVID variant that successfully pulled the rug out from underneath markets on Friday, even though the ultimate impact of that variant is far from certain.

But regardless of whether or not the market’s reaction on Friday ultimately proves to have been overdone or underdone (insert cheeky reference to Thursday’s Thanksgiving ham <here>,) the arrival on the scene of Omicron, the world’s latest and mostly ambiguous Transformer, successfully did at least one thing we can be certain of: it reminded us that the virus is still entirely capable of calling the shots.

What to Watch This Week

November 29–December 5

Notable economic events (November 29– December 3)

Monday: Pending home sales, Dallas Fed

Tuesday: Home prices (x2), Conference Board consumer confidence, Powell/Yellen Senate testimony

Wednesday: ADP payrolls, ISM/PMI Manufacturing, Powell/Yellen (House)

Thursday: Weekly jobless claims, Challenger layoffs, OPEC+

Friday: Payrolls, ISM/PMI services

Last week’s holiday calendar ended up packing a whole lot of economic data into a short week, even if most of that data did little to change anyone’s outlook (instead, Omicron took care of that.) This week is more of the same, with the payroll trifecta (ADP, Challenger layoffs and non-farm payrolls) joining a full slate of Purchasing Managers’ Indices (PMIs) on the list of things to watch. (And yeah, Omicron will still matter, too.)

As far as the PMI data are concerned, the story remains very well-known. Labor and raw material shortages, rising prices, and blah-blah-blah-de-blah blah… As has been true for months now, it would take a really big deviation from that script to grab the market’s attention. Ditto for Tuesday’s consumer confidence data from the Conference Board: unless it says something radically different than last week’s UofM survey, expect markets to take little notice.

With regard to payrolls, economists and analysts will be looking for solid – but not too solid – progress on the jobs front. The fun starts on Wednesday with ADP’s estimate of job creation, followed by outplacement firm Challenger Gray and Christmas’ catalog of layoffs on Thursday and the Bureau of Labor Statistics’ employment situation report – a veritable datapalooza for labor market analysts – on Friday. There seem to be only moderate chances that anything dramatic enough to surprise markets will emerge from any of these reports, but it’s worth remembering that at this point in the cycle, a massive upside surprise could be as dangerous as a big downside surprise to market sentiment given that it might influence the future direction of wages and/or inflation and therefore policy.

Speaking of policy, this week’s biggest (non-COVID) news item could be joint testimony from newly re-nominated Fed Chair Jerome Powell and Fed alumna (now Treasury Secretary) Janet Yellen. The pair will once again trek to Capitol Hill to brief Senators (Tuesday) and House Members (Wednesday) on the status of COVID relief efforts. That discussion suddenly got a little more relevant with WHO’s Omicron announcement on Friday, and I also seriously doubt members of Congress will pass on the chance to grill the nation’s most prominent and practically-relevant economists about things like inflation.

Even more relevant, expect Chair Powell to be questioned about the circumstances under which he and his pals at the Fed might alter their plan for tapering given the shifting ground regarding the virus, fiscal stimulus and prices. From Secretary Yellen’s perspective, I strongly suspect that she’s organizing her notes about the pending debt ceiling discussion for the moment during her testimony when lawmakers take the opportunity to make political hay from this looming (potential) crisis. Remember to mark your calendars, because X-Day is December 15!

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Personal Capital Advisors Corporation (“PCAC”) is a wholly owned subsidiary of Personal Capital Corporation (“PCC”), an Empower company. PCC and Empower Holdings, LLC are wholly owned subsidiaries of Great-West Lifeco Inc. Source for index data: Bloomberg.com; GWI calculations.


[1] https://www.who.int/news/item/26-11-2021-classification-of-omicron-(b.1.1.529)-sars-cov-2-variant-of-concern

[2] Data: Bloomberg, GWI calculations

[3] Bloomberg, 11/22/21

[4] https://www.markiteconomics.com/Public/Home/PressRelease/c4f8600b63124921b109fba93bf6d523

[5] https://www.bea.gov/news/2021/personal-income-and-outlays-october-2021

[6] http://www.sca.isr.umich.edu/

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