Uncertainty is the word of the day as the impact of the Omicron variant of Covid-19 is a cause for trepidation among investors, sending markets on a rollercoaster ride.
The initial news of the new variant, first detected in southern Africa, sent markets spiraling. Amid the panic, market indexes saw their largest declines in months, with travel, hospitality, and energy stocks taking the biggest hits in a holiday-shortened trading session.
However, as Monday morning rolled around, the market seemed to be taking a more optimistic outlook. Pershing Square CEO Bill Ackman perhaps best summed up this rosier outlook as the new week of trading began.
"While it is too early to have definitive data, early reported data suggest that the Omicron virus causes 'mild to moderate' symptoms (less severity) and is more transmissible," Ackman said in a tweet Sunday evening. "If this turns out to be true, this is bullish not bearish for markets."
Tuesday morning was a repeat of Friday amid increased apprehension on the strain and the potential effectiveness of vaccines (in addition to comments from Fed Chair Jerome Powell), only to see Wednesday morning mirror Monday's action for a bounce.
As the volatility wins out, investors may be asking whether they can really believe any bounce as Ackman suggests, or if the worst is yet to come.
Assessing Omicron
The main cause for anxiety in the markets at present is not just the new variant, but its potential to be more virulent and, perhaps, more deadly.
"This variant has a large number of mutations, some of which are concerning," the WHO said in a report on the new variant. "Preliminary evidence suggests an increased risk of reinfection with this variant, as compared to other VOCs."
The international organization further noted that the number of cases in its epicenter in South Africa continue to surge more rapidly than other variants.
Adding to concern are comments from pharmaceutical leaders like Moderna (MRNA) CEO Stéphane Bancel who indicated the current vaccines might not curtail its spread.
"There is no world, I think, where (the effectiveness) is the same level . . . we had with Delta," he told the Financial Times in an interview. "I think it's going to be a material drop. I just don't know how much because we need to wait for the data. But all the scientists I've talked to . . . are like 'this is not going to be good.'"
Expectations from Regeneron (REGN) and its monoclonal antibody treatments as well as Merck's (MRK) pill were also noted as likely lagging in efficacy against the new variant.
Studying Previous Strains
However, it is a look at these previous strains, such as the Delta variant that roiled markets earlier this year, that might offer investors the best roadmap to handle the current market volatility.
As investors will certainly recall, Delta led to a major decline in indexes early in the year, only to form a base for a rally as vaccines proved effective in deterring the impact. As Omicron now emerges, investors must be feeling a sense of deja vu.
Yet, the important tact for investors might be in the competition of these strains rather than just the emergence of the latest mutation.
"The accumulation of variations and its initial detection in Africa suggest that our fears have been realized," Citi analyst Andrew Baum told investors in a note. "Concern over [Omicron] needs to be balanced against the failure of other concerning variants such as Beta to outcompete Delta."
Indeed, this is a crucial point for investors to watch, as even the WHO that initially came out with an abundance of caution has since softened its stance on a comparison to Delta.
"It is not yet clear whether Omicron is more transmissible compared to other variants, including Delta," the organization wrote in an update on Sunday. "The number of people testing positive has risen in areas of South Africa affected by this variant, but epidemiologic studies are underway to understand if it is because of Omicron or other factors."
Further, despite some cautious words from Moderna, Regeneron, Merck and others, there is an air of confidence among executives of global health organizations.
"We know that viruses mutate, and we're prepared," Emer Cooke, the executive director of the European Medicines Agency, told the European Parliament's health committee Tuesday, as an example.
The conviction on this end is likely bolstered by German vaccine leader BionTech SE (BNTX) and its American partner Pfizer's (PFE) ability to make vaccines that are capable of contending with variants. That is not to mention the rapid development of their initial vaccine that proved incredibly effective at reducing risk of hospitalization and death even through these successive mutations.
Sector Selection
So, if this more sanguine view of markets appears a sane one amid the abundance of uncertainty, one would be inclined to deploy more capital into an apparently discounted market. Stilll, sector selection will remain paramount as pandemic effects continue to permeate.
"Last week's selloff on Friday was likely the combination of uncertainty around a new virus strain, coupled with long holiday weekend illiquidity," Sylvia Jablonski Kampaktsis told Real Money. "It felt like a knee jerk reaction, and the past versions of this have happened somewhat quickly and, as time goes on, with a more shallow impact on the market."
However, she noted that sector selection will remain key as pandemic effects continue to spread. Primarily, she noted that high-quality tech dragged down by broader moves are a good place to start, while airline, cruise and hotel stocks could be best positioned for a "bounce-back" trade.
"The travel industry took close to $5 trillion out of the economy, and it hasn't recovered," Kampaktsis noted. "That bodes well for a bounce-back trade, but keep in mind it will take some time to pan out."
She added finally that banks appear well positioned ahead of potential rate hikes and were likely unfairly battered on Friday. This theme is particularly interesting to note as Fed chair Jerome Powell offers more commentary indicating increased concern on inflation. His commentary in his second day of testimony on Wednesday will be crucial for investors to keep an eye on.
Patrick Liu, senior financial analyst at the Singapore-based hedge fund JJ Richman, largely agreed with Kampaktsis in expecting investors to seek out discounts in depressed sectors.
"Banks and travel stocks, including airlines and cruise operators, are likely to get a bit of lift from bargain hunters," he told Real Money. "Although the ones that will inevitably get the most attention would be pharma, particularly vaccine manufacturers such as Johnson & Johnson (JNJ) , Moderna, Pfizer as they move towards adjusting and reformulating their vaccines to the Omicron variant."
Finally, there is some speculation that energy stocks could be an appetizing opportunity as pandemic concerns drive concerns over demand. Should the variant prove less deleterious than the presently pessimistic mood suggests, the sector could be set for another surge. Wednesday morning's action in the WTI and Brent indexes are certainly indicative of this action.
For more on finding an entry point in oil stocks specifically, read Carley Garner's piece on support levels for investors to stay apprised of.
