A Call for Calm After a Rocky Friday and a New Variant’s Emergence

Stocks weren’t in the holiday spirit on Friday, falling sharply on fears of a new COVID variant, chiefly hailing from South Africa, that the World Health Organization dubbed Omicron. UK stocks fell -3.7% on the day, whilst America’s S&P 500 slumped -2.3% (in USD), notching its worst Black Friday session on record.^[i] In response, the US, UK and EU imposed restrictions on travel from a group of southern African countries.^[ii] It all adds to worries we have seen from financial commentators we follow over a virus uptick this winter, with many fearing the variant will interrupt economic activity and hit stocks hard. However, we think investors benefit from staying cool—and thinking like stocks. Yet another variant can be troubling on a human level—and try one’s willpower. However, from an investment perspective, we think the past two years have shown the real market risk isn’t the outbreaks themselves, but governments’ reactions to them. On that front, we see little sign much of anything changed on Friday.

Besides being first identified in South Africa, we know next to nothing about the scope of Omicron. Health experts cited in news publications we follow don’t yet know how infectious, contagious, severe or lethal this variant is. However, as legendary investor Benjamin Graham put it, in the short term, markets are voting machines—and the news of a new variant likely spooked investors on a day when US markets close early. In our experience, those shortened sessions can mean thin trading volumes in some markets, likely exacerbating fluctuations. However, we don’t think markets are likely to be flustered for long: They have seen this movie before.

Whilst it may be tough to fathom, we have been living with COVID—the original outbreak and subsequent variants—for almost two years now. To us, that recent history shows outbreaks themselves aren’t negative for stocks—the actual market risk arises from economic lockdowns. When governments worldwide suddenly implemented lockdowns in early 2020, stocks priced in the severe economic disruption, resulting in a record-fast bear market (a bear market is a typically long, fundamentally driven equity market decline exceeding -20%). But stocks also priced in lockdowns’ impact quickly—and moved on. Equities began rising in March 2020, long before lockdowns even lifted. They continued rising when caseloads rose that autumn. In our view, markets dealt with the clear downside of lockdowns on economic activity—and looked beyond them.

Take the Delta variant, which was first identified in India in December 2020. It swept through that country and the UK, eventually reaching the US early this year. Though Delta has shown to be more contagious than previous variants, its spread didn’t derail markets—global stocks have posted a banner year, up 23.8% before Friday’s volatility struck.^[iii] Despite Delta dominating headlines for much of the year, we think surprises move markets most, and at this point, COVID lacks much negative shock power.

New developments can spook headlines on a daily basis, and volatility can arise in the short term for any or no reason. But we think stocks also recognise that, despite all the COVID-related noise, society—businesses, households and governments—have adjusted to living with the virus. Despite ongoing COVID restrictions, high-frequency economic data have shown outbreaks’ economic impact has generally decreased with each new rise in caseloads.^[iv] Whilst real-time data are limited and backward-looking, in our view, they do highlight the adaptability and resiliency of industries hit hardest by the pandemic—despite COVID’s ongoing presence. Stocks likely saw all this in advance, which we think is one reason Delta’s rise and the persistence of COVID overall haven’t been a huge headwind to broad markets since the lockdowns.

Now, as we have written before, lockdowns are human decisions, which defy prediction—and it is possible they return broadly. However, we don’t see signs they will come back en masse despite some smaller nations (e.g., Austria and Slovakia) implementing some forms of them recently. Consider: Most countries that pursued “Zero Covid” policies (i.e., efforts designed to contain COVID through closed borders and lockdowns until there were no new cases) have abandoned them. New Zealand, Singapore and Australia are among those now pursuing less-restrictive ways of living with the virus.^[v] In our view, that approach illustrates how governments—along with businesses and households—have adjusted to living in a COVID world.

To be clear, we don’t dismiss the impact of a new COVID outbreak, especially as a public health issue or its impact on human life. But from an investing perspective, much of the speculation we saw amongst financial commentators Friday seems to presume the worst-case scenario. However, we simply don’t know how bad it will be, if at all right now, and no one knows whether renewed lockdowns are coming, in our view. An Omicron wave could be bad—but it could also simply be another brick in the wall of worry markets climb. Hence, we suggest investors grit their teeth and ask themselves, “Is this time different?” In our view, it is highly likely that it isn’t.