Omicron Becomes Omicold, Boosting Stocks

Omicron, the most contagious strain of Covid so far, has gone viral worldwide. The current wave has reached the highest daily caseload of Covid since the pandemic began – despite a year of vaccines and boosters. 

Although Omicron has manifested as more of a cold than previous variants of a more lethal nature, new Government mandates and premature alarm bells have curtailed travel and economic potential. This Omicold should peak in January with far less hospitalization than expected, yet an increasing number of major cities are instituting vaccine passports for diners, shoppers and workers. Further Covid fighting efforts are being proposed to enforce wearing of more restrictive masks indoors and outside as well as national vaccine passports for travel. Likely these more restrictive mandates and proposals will be reversed later in Q1, assuming Covid Cases, Deaths and Hospitalizations fall sharply as most expect.

In a prior report we espoused the gentling tendency of viruses as they evolve and Omicron continues to match those expectations. Statistical proof of this is illustrated by Omicold’s new record level of cases globally that has coincided with declining deaths. Unlike the Delta and previous waves of Covid, Omicron’s spike protein is hard to split which increases its contagion, but reduces its penetration of the lungs that had been so deadly with earlier variations. Omicron has affected the sinuses and upper respiratory primarily, which has reduced and shortened hospitalizations.

In the 2017 – 2019 period we frequently noted the record growth in consumer spending as exhibited by the Redbook Same Store Sales Index. After the brief collapse in consumption when the Covid lockdowns began in March 2020, the  rebound continued to be an extended “V” shape, courtesy of fiscal and monetary injections. The utilization of household stockpiles and sated renovation projects when Covid abates should slow consumer spending to normal or briefly below normal below normal growth rates as supply chain bottlenecks ease over the next year. When that slowdown or normalization arrives, earnings forecasts will fall and larger stock market corrections will ensue.

Another example of a super charged growth factor supporting the spending boom is highlighted below in the continued explosion of Business Formations. With free money, to the tune of $4 Trillion in fiscal stimulus and $4.5 Trillion of Central Bank asset purchases, the steroidal leap in new company creations appears justified. Of course this too shall pass as the artificial stimulus and excess personal savings are spent, forcing companies and individuals to start borrowing again with a higher cost of capital and reduced growth rates.

The good news train of earnings and sales continues to roll with a healthy disbelief by most investors as shown by our sentiment heavy measures below. Money managers as a whole are positive, looking for Stock Indices to appreciate 5 to 12% in 2022, although far less than the stellar 28+% total return (with Dividends) in the FANG led SP 500 Index in 2021. Roughly a third of 2021’s gains were accounted for by just 5 stocks (Apple, Microsoft, Google, Tesla and Nvidia). Few managers matched these results unless they ignored diversification and opted for enormous exposure to those 5 names and other unique story stocks or memes. Given the breathtaking surge averaging over 26% in the benchmark SP 500 Index the past 3 years compared to a long term norm of 10%, no manager would dare project 2022 as another year of more than double the historical average. However, stretched valuations and upward momentum have been so positive as to keep investors cautious in their short term outlook. The twin minor market corrections of 5% in December may have dented small investor and option trader enthusiasm, as exemplified by the Santa Claus rally to new record highs during the final week of the year that only bumped sentiment to neutral levels. After a record 71 new all-time highs in 2021, finishing the year within 1% of another record, investors are far from overly optimistic from a short term perspective. While some profit taking by the 2nd half of January in the new year is due according to Seasonality, there is no reason to expect a deep pullback until sentiment becomes more overbought. This may require a test of the vaunted SP 500 Index 5,000 price level. Much deeper corrections, as much as 10 to 15%, are likely in 2022 as economic growth slows post stimulus and the supply chain improves. The markets may anticipate this easing of the inflationary Supply Chain by Summer, resulting in a momentum peak in Q1 or Q2 of 2022, baring another wave of Covid and the passage of new Federal Reserve and Government stimulus. 

Our ExecSpec diversification, that included some travel and small cap growth in 2021, has lagged the mega cap growth segment due to the prolonged contagion fears of Covid that keeps stimulus elevated, strongly favoring FANG and leading sectors as illustrated below. If Omicron represents a fair expectation of the evolutionary progression of Covid, then 2022 should finally experience rotation away from 2020 and 2021 leaders into the laggards. 

 

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