More Bark Than Bite, Benign Omicron Buoys Stocks

Coronaviruses are very common. Most are harmless and only a small percent are able to mutate sufficiently to jump from animals to humans as well as become highly transmissible. The prevailing wisdom is that virsues become less pathogenic over time, obeying the Darwinian Theory, “Survival of the Fittest”. If a virus is too deadly it will lose its transmissibility by killing its host before being able to infect new ones. It’s logical that a virus needs to mutate into less virulent forms in order that hosts can carry it safely for longer periods of time, like the common cold. Coronaviruses, such as the deadly SARS and MERS strains, virtually disappeared soon after they became alarming, thus requiring no vaccines. While the late summer Delta wave of Covid appeared to be of similar lethality as the original Covid-19 of 2020, Omicron has quickly displaced all the Covid variants as the dominant strain with far greater transmissibility. True to the evolutionary gentlying that has been theorized, Omicron appears to be far less deadly and lacks the hyper-reactive immune system response of the respiratory defenses that has claimed over 5 million lives globally. The Canary in the Coal Mine is South Africa, where Omicron emanated. Viral cases exploded higher in early December and just as quickly appear to be fading away.

More importantly, after almost 3 weeks of surging infections, fatalities have barely moved from their pandemic nadir. Early indications around the world support the data coming out of South Africa. The spread inside the US has only just begun, but current projections assume the peak will occur in January and decline faster than past Covid waves and with far fewer hospitalizations or deaths than originally feared. The facts may change, but the rebound in Oil and equity markets suggest a more positive economic outlook as we progress through Q1 2022. This may finally bode well for the reopening travel stocks (Casinos, Airlines and Crusie ships) that have been among the only sectors unable to participate in this record running Bull market.

When the news that Omicron had indeed spread around the Globe as feared last week, along with a failure of the Biden $4.7 Trillion Social Stimulus bill, stock indices tanked 5 to 6% in just over 2 days. Governments and investors have been trained to overreact and panic without hesitation. Stocks are valued upon expectations of future growth and the sudden concern was that the economy and earnings would slow significantly due to social, vocational and travel restrictions. Travel bans, social distancing mandates and outright stay home from work lockdowns became a brief pandemic in itself this past week. While most of the mandates remain, the investment markets have quickly noted the more anodyne nature of Omicron and its short shelf life.  Volatilty metrics rise during market corrections and after an extreme few weeks of violent routes and rallies this December, stock indcies are primed to reach record highs in the days ahead.

The major US stock indices have retraced most of the sharp 3 day decline of 5% with an equally impressive rally the past 2 days. As long as the SP 500 Index remains above 4600, we would expect a continuation to record highs during this Seasonally positive period into early January. Should prices run to record highs as expected, above the 4740’s, money managers will increasingly train their sights upon the major round number of 5000, which can act like a magnet as it approaches. 

An overly pessimistic option trader sentiment reading at the twin 5% lows in December add further technical support to this sharp 2 day rebound in stocks. There are plenty of concerns in 2022, such as the Fed rapidly withdrawing $120 Billion in monthly Bond purchases and fading prospects of further fiscal stimulus that have been major pillars of this 21 month old Bull market. As markets are forward looking, lofty forecasts of GDP growth and corporate earnings in 2022 will slow asset appreciation and trigger more frequent or deeper corrections. However, in the short term, excess cash, a strong economy and extraordinarily cheap interest rates are likely to underpin this Bull market into early 2022. Most important to the Bull reaching its full potential is the “Buy the Rumor” adage of a global economy free of any serious Covid restrictions at some point in 2022. With the backdrop of the vast majority of  the globe having been vaccinated or exposed to natural immunity, combined with the approval this week of an effective post infection therapeutic and increasingly more benign virus strains, it emboldens investors to continue Buying the rumor of a virus free economy. When social mandates are removed and international travel can finally resume, the market will reduce its market multiple on the prospects of peak valuations that are likely to set up the next Bear market within the next 12 to 18 months.

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