December 1, 2021
Good morning,
Just as the market seemed to be re-pricing the uncertainty from the unknown Omicron variant and working off the Friday’s semi-holiday over-reaction with a rally on Monday, another unexpected surprise hit on Tuesday. Jerome Powell’s “hawkish pivot” yesterday during Senate testimony brought on another wave of selling and markets dropped another 2%-ish on the day.
Now what? Getting technical and without playing armchair epidemiologists, what we can do is analyze the market’s reaction to COVID news and put it into perspective. Here are five things we know:
- First, the market hates uncertainty. The risks of the Omicron variant will not be known for weeks, so it is possible that risk-on assets remain on the defensive until more is known. Markets being discounting mechanisms, prices should move before all the information is public.
- Second, from a technical perspective, Friday’s sell-off did not put the stock market into deeply oversold territory.
- Third, short-term investor sentiment has fallen from extreme optimism but has not reached extremely pessimistic levels.
- Fourth, longer-term breadth measures have weakened but remain healthy.
- Fifth, the Fed has less flexibility than during previous variant surges.
Taken together, they suggest the market did not reach short-term extremes on Friday, although another sell-off, like yesterday, could push some indicators into oversold territory. If news in the coming days is positive, it could set the stage for a year-end rally. Longer term, how policymakers react to it could determine how 2022 unfolds.
Be well,
Mike