“Ironically, it may be the omicron scare itself that now creates the best possibility of some relief over the period, either because incoming news about the variant is better than feared or because monetary policy makers take a somewhat more cautious stance in response to the news,” wrote Dominic Wilson at Goldman.
At UBS’s wealth-management unit, a team led by chief investment officer Mark Haefele is telling clients to stay invested with the base case of robust economic growth intact and any concerns only likely to reduce monetary-tightening fears. At Nordea Investment Funds, senior macro strategist Sebastien Galy calls it a buying opportunity.
After a spike in volatility like the VIX’s 10-point jump Friday, stocks usually stage “robust reversals,” writes Jonathan Golub, chief U.S. equity strategist at Credit Suisse, in a Monday note.
Yet the policy response function may be less clear-cut than it was in the first all-hands-on-deck phase of the pandemic. Last year’s experience underscored the risk that if consumers shift their spending toward goods amid supply-chain bottlenecks, renewed virus anxieties can actually be inflationary.
New infections may also temporarily shrink the labor force, suggests Neil Shearing, chief economist at Capital Economics.
“Compared to previous waves of the virus, which were on balance disinflationary, a major new wave could now be inflationary,” he wrote in a note. “All of this further complicates an already-complex policy challenge.”
It’s a big shift from a week ago, when investors were largely preoccupied with the rate outlook based on the pace of the U.S. recovery. An index for economic surprises only this month returned to positive territory, as payrolls and retail sales expanded faster than expected.
But for investors giddy after the 66 record highs notched by the S&P 500 this year, an intensifying Covid risk is hard to ignore.
“I am not too positive on the situation as the cause of the selloff was the new variant, but it is also worth considering that the number of infections levels in Europe were unfortunately increasing anyway,” said Alberto Tocchio, a portfolio manager at Kairos Partners. “We will need more data before we will be able to judge.”
—With assistance from Nikos Chrysoloras, Ksenia Galouchko and Joe Weisenthal.
This article was provided by Bloomberg News.