With Omicron, Stock Analysts Expecting More Uncertainty

On Wall Street, the end of the pandemic appeared tantalizingly close just a week ago. There were positive signs the economy was rebounding, and investors’ biggest worry was how quickly the Federal Reserve would pivot away from the market-boosting policies that have helped stocks soar in the past year and a half.

The Omicron variant changed that almost overnight.

Investors and analysts have snapped their attention back on the virus as they try to assess the myriad ways the concerning new iteration could undermine an often overlooked source of market confidence this year: the effectiveness of vaccines.

Now the markets face weeks of uncertainty and increased volatility as investors once again closely watch public health updates arriving hour by hour, analysts said.

Despite a solid rally on Monday — the S&P 500 rose 1.3 percent, recovering some of the ground lost in a panicky slide on Friday — most analysts suggested that there was just too little information available to make a concrete call on the path forward.

“We just have to deal with this, and with any new variants that we get, with a little bit of humility,” said Gargi Chaudhuri, head of iShares Investment Strategy, Americas at the asset management firm BlackRock. “Today, for anybody in the market to say that, ‘Yes, we should absolutely be buying the dip based on just the Omicron news,’ I think it’s just guesswork, for anybody. Because we just don’t know.”

That hasn’t stopped speculation, of course. On Sunday, William Ackman, the billionaire founder of Pershing Square Capital Management, struck a hopeful tone on Twitter: If the Omicron variant is more easily transmissible but also more mild, he suggested, it would bode well for stock prices that have risen with only brief interruptions since plunging in the early days of the pandemic.

The past year has been, overall, a remarkable stretch — the S&P is up nearly 24 percent for the year, in large part because of the arrival of highly effective vaccines. As vaccination rates have increased, the economy has slowly reopened and investors focused more on the lingering effects of the shutdowns that were necessary before inoculation was possible.

But the Omicron variant — which triggered travel restrictions almost immediately after it was identified — snapped many people back to those early days. And analysts expect investors to follow along closely as public health officials assess how dangerous, contagious and potentially resistant to vaccines the new variant may be.

“In the next two weeks, from both Pfizer-BioNTech and Moderna, we’ll know how effective the current vaccines are against this new variant,” said Evan David Seigerman, an analyst who covers biopharmaceutical stocks for BMO Capital Markets.

The threat of a new variant always lurked as perhaps the key source of risk investors faced, even as they largely shrugged off the slowdown caused by the Delta variant over the summer. Analysts regularly noted that there was still a possibility that a new permutation could emerge with the potential to derail the market’s rise.

But in recent weeks, investors had grown increasingly confident about the potential for an almost complete economic reopening in the coming year. Shares of so-called stay-at-home stocks such as Peloton and Zoom Video, which generated enormous gains during the pandemic, started to slide fast. Companies set to benefit from a robust return to in-person activity next year — such as concert promoters, hotels and airlines — were on a tear. The stock market notched a series of record highs. In the bond market, investors were boosting bets that the Federal Reserve would start raising interest rates next year, as the economy roared and inflation remained hot.

“We definitely were at an inflection point for market expectations until Friday,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York. “And that’s why we saw such a dramatic re-pricing.”

Unnerving news about the Omicron variant began to emerge from South Africa on Thursday, as Wall Street was closed for the Thanksgiving holiday. On Friday, when the World Health Organization labeled Omicron a “variant of concern,” stocks fell 2.3 percent — the S&P 500’s worst single-day performance since late February.

Shares of stay-at-home stocks and vaccine makers soared as investors moved money to parts of the market that did the best during the darkest days of the pandemic. In the bond market, investors began to reverse their previous bets that the Fed could start raising interest rates early next year, suggesting they thought Omicron could cause a sudden economic slowdown.

Some analysts suggest the scale of the market shock on Friday might have been exaggerated by the relatively light trading activity, as many investors and traders were on a four-day weekend for Thanksgiving.

“I’m always a little skeptical of market moves on light trading days,said David Kelly, chief global strategist at J.P. Morgan Asset Management.

But even after Monday’s rebound — the market’s best one-day gain in six weeks — investors have reason to remain twitchy. On Monday evening, the Federal Reserve chairman, Jerome H. Powell, said in prepared testimony released before a hearing on Tuesday before the Senate Banking Committee that the Omicron variant posed a variety of risks, including to employment, economic activity and uncertainty related to inflation.

“Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions,” he wrote.

For now, “could” remains the operative word.

Lori Calvasina, head of U.S. equity strategy with RBC Capital Markets in New York, said the fear markets showed on Friday had changed to more of a watchful approach.

“I think that sort of wait-and-see mentality is appropriate,” she said. “I don’t think we have enough information right now.”

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