A Call for Calm After a Rocky Black 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. The S&P 500 slumped -2.3%, 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. It all adds to worries over a virus uptick this winter, with many fearing the variant will interrupt economic activity and hit stocks hard. Hence, economically sensitive sectors—e.g., Energy, Financials and Industrials—declined the most in reaction to the news.^[ii] But stay cool—and think like stocks. Yet another variant can be troubling on a human level—and try one’s willpower. However, from an investment perspective, the past two years have shown the real market risk isn’t the outbreaks themselves, but governments’ reactions to them. On that front, there is 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 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. Moreover, 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.

While it may be tough to fathom, we have been living with COVID—the original outbreak and subsequent variants—for almost two years now. That recent history shows outbreaks themselves aren’t negative for stocks. Instead, 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. But stocks also priced in lockdowns’ impact quickly—and moved on. They began rising in March 2020, long before lockdowns even lifted. They continued rising when caseloads rose that fall. 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. Even including today’s pullback, the S&P 500 remains nicely positive, up 22.3% year to date.^[iii] Despite Delta dominating headlines for much of the year, 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 stocks also recognize 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 data have shown outbreaks’ economic impact has generally decreased with each new rise in caseloads. In the US this year, TSA checkpoint travel numbers, hotel occupancy rates and weekly initial jobless claims have continued to improve despite the Delta variant. While real-time data are limited and backward-looking, 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, one reason Delta’s rise and the persistence of COVID overall haven’t been a huge headwind to broad markets since the lockdowns, in our view.

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. 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 toll on human life. But from an investing perspective, much of the speculation we saw 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. An Omicron wave could be bad—but it could also simply be another brick in the wall of worry markets climb. We recommend investors grit their teeth and ask themselves, “Is this time different?” In our view, it is highly likely that it isn’t.