11.29.2021: Just as dedicated shoppers were lining up for their Black Friday bargains and investors were rising from their turkey-induced tryptophan comas, the world learned about Omicron, the latest COVID-19 variant. The World Health Organization (WHO) designated Omicron a “variant of concern,” meaning the new strain is more contagious and could lead to more serious illness, or could potentially decrease the effectiveness of public-health measures, COVID-19 tests, treatments or vaccines, according to a New York Times report. “Variant of concern” is WHO’s second most serious category. Investors did not take the news lying down. The Dow Jones Industrial Average plunged 900 points on Friday, its worst daily move in more than a year. US crude slid 13 per cent and US Treasury yields sagged, reflecting investors’ images of lockdowns and proving COVID concerns remain one of the post potent forces in the markets near term, eclipsing inflation in its impact. Gold prices edged higher while Bitcoin slumped 4.5 per cent, testing its safe-haven, store-of-value status.
The Omicron variant, detected on November 9, has already been reported in South Africa, Hong Kong, Belgium, Israel, Canada and Australia. Governments worldwide, including the United States, wasted no time restricting travel from South Africa and countries surrounding it. The World Trade Organization said it will indefinitely postpone its Ministerial Conference, scheduled to start this week in Geneva. Omicron has more mutations than prior strains, which policymakers fear could make it more transmissible or test the effectiveness of the vaccines.
It’s too early to tell whether or not Omicron will affect economies and markets. The new variant’s infectiousness and virulence have yet to be determined, and it will be several weeks before researchers will be able to draw initial conclusions. Meanwhile, the Delta variant, found last December, remains the dominant strain in the US, representing 99.9 per cent of all COVID cases sequenced. While Omicron has not yet been identified in America, its arrival is all but inevitable.
Viruses, because they replicate so quickly, are mutable. Most of their mutations make no difference to how they behave. Occasionally, certain mutations can make the virus spread faster or improve its ability to evade the body’s immune system or treatments. The high number of mutations on Omicron’s spike protein concerns virologists. Currently there is no evidence than any of the mutations, including Omicron, affect the new at-home antiviral treatments developed by Merck. That said, the pharmaceutical company announced on Friday that in a final analysis of a clinical trial, its antiviral pill reduced the risk of hospitalization and death among high-risk COVID patients by 30 per cent, down from an earlier estimate of 50 per cent. Pfizer says it will take about two weeks to determine whether the new variant renders its shot less effective. Other companies believe a new vaccine, if needed, could be adjusted to any variant, produced within six weeks and shipped within 100 days. Moderna said Friday it will fast-track a booster targeting the Omicron variant.
So far there has been no evidence that patients infected with the Omicron variant suffered different symptoms from those of other strains. Moreover, there’s no sign that Omicron caused more serious illness, although scientists are worried by how quickly the virus has spread in South Africa over the last few weeks. It’s possible the virus’ transmission rate is high because its symptoms are less severe, with a large share of those infected exhibiting few or no symptoms. Moreover, experts believe it’s extremely unlikely that Omicron will render COVID-19 vaccines ineffective.
Omicron transmission and impact bears further watching. Investors and policymakers should avoid giving in to fear or complacency. COVID-induced selloffs have tended to be short-lived, as investors, unable to weigh the consequences, take a “sell first and ask questions later” approach. The S&P 500 suffered a one-week selloff, dipping about 1.5 per cent when the Delta variant was first disclosed, but quickly reversing and rallying 5 per cent by mid-January. The CBOE Volatility Index (VIX) surged 54 per cent last Friday, against a backdrop of light trading volume due to a holiday-shortened trading day. US stock exchanges, which typically trade more than 13 billion shares in an active session, traded fewer than nine billion shares on Friday, implying exaggerated market movement. Margin balances are another factor influencing selling. Thanks to heavy margin borrowing by retail investors any risk to the downside prompts knee-jerk selling by those shallow-pocketed investors; not necessarily for fundamental reasons, but for fear of receiving that dreaded margin call.
In our view, it’s too early to draw pessimistic trendlines. While South African infections escalated quickly, it’s possible that Omicron’s rapid spread could have been the result of a super-spreader event in a nation where fewer than 25 per cent of the population are vaccinated, making the variant appear more transmissible than it actually is. From our perspective, Friday’s investors were trading as if the world were going back into lockdown. That scenario is highly unlikely based on what we know today.