Wall St Week Ahead Fear of COVID-19 reappears as a threat to the market

The floor of the New York Stock Exchange (NYSE) is seen after the close of trading in New York, USA, March 18, 2020. REUTERS / Lucas Jackson

NEW YORK, November 26 (Reuters) – COVID-19 has reappeared as a concern for investors and a potential driver of major market movements after a new variant triggered the alarm, long after the threat had subsided in Wall Street’s eyes.

Concerns about a new strain of the virus, called Omicron and classified by the World Health Organization as a variant of concern, slammed markets around the world, giving the S&P 500 Index (.SPX) its largest percentage loss in one day in nine months. The movements came a day after the American Thanksgiving holiday when thin volume probably aggravated the movements. read more

With little known about the new variant, the long-term implications for US assets were unclear. At the very least, investors said there were signs that the new strain was spreading, and questions about opposition to vaccines could weigh on the so-called reopening trade that has lifted markets at various times this year.

The new strain could also complicate the outlook for how aggressively the Federal Reserve normalizes monetary policy to combat inflation. read more

“Markets celebrate the end of the pandemic. Slam. It’s not over,” said David Kotok, chairman and chief investment officer of Cumberland Advisors. “All political issues, which mean monetary policy, business paths, projections for GDP growth, extraction of leisure and hospitality, the list goes on, are pending.”

The S&P 500 fell by a third as pandemic fears disappeared in early 2020, but have more than doubled in value since then, although the ebb and flow of the pandemic has at times driven violent rotations in the types of stocks favored by investors. The index is up more than 22 percent this year.

Prior to Friday, broader vaccine availability and advances in treatments made the markets potentially less sensitive to COVID-19. The virus had dropped to a distant fifth place on a list of so-called “tail risks” for the market in a recent survey among fund managers conducted by BofA Global Research, with inflation and central bank increases taking the top positions.

On Friday, however, technology and growth stocks that had made progress during last year’s so-called stay-at-home trading rose, including Zoom Communications (ZM.O), Netflix Inc (NFLX.O) and Peloton (PTON.O).

At the same time, stocks that have risen this year on bets on economic reopening could suffer if fears of the virus increase. Energy, finance and other economically sensitive stocks fell on Friday, as did the shares of many travel-related companies such as airlines and hotels.

The new Omicron coronavirus variant spread further around the world on Sunday, with 13 cases found in the Netherlands and two each in Denmark and Australia, although several countries tried to seal themselves by imposing travel restrictions.

The new variant was first discovered in South Africa, and is now also discovered in the United Kingdom, Germany, Italy, the Netherlands, Denmark, Belgium, Botswana, Israel, Australia and Hong Kong. read more

Friday’s fluctuations also sent the Cboe Volatility Index (.VIX), known as Wall Street’s fear meter, soaring and option investors trying to hedge their portfolios against further market fluctuations. read more

Andrew Thrasher, portfolio manager for The Financial Enhancement Group, had been concerned about recent gains in a handful of high-weight technology stocks in the S&P 500, including Apple Inc (AAPL.O), Amazon.com Inc (AMZN.O), Microsoft Corp ( MSFT.O) masked weaknesses in the broader market.

“This set fire to sellers pushing markets down, and the latest COVID news seems to have kindled the bearish flame,” he said.

Some investors said the recent COVID-19-related weakness could be a chance to buy stocks at relatively lower levels, and expect the market to continue to recover quickly after the fall, a pattern that has marked March to record highs this year.

“We have had many days when economic optimism collapses. Each of these optimism collapses was a great buying opportunity,” wrote Bill Smead, founder of Smead Capital Management, in a note to investors. Among the stocks he recommended were Occidental Petroleum (OXY.N) and Macerich Co (MAC.N), down 7.2% and 5.2% respectively on Friday.

One of several wildcards is whether virus-driven economic uncertainty will slow the Federal Reserve’s plans to normalize monetary policy, just as it has begun phasing out its $ 120 billion-a-month bond purchase program.

Futures on the US Federal Funds rate, which tracks short-term interest rate expectations, showed on Friday that investors rolled back their view of a faster-than-expected rate hike.

Investors will follow Fed Chairman Jerome Powell and US Treasury Secretary Janet Yellen’s appearance before Congress to discuss the government’s COVID response on November 30, as well as US employment figures, which come next Friday.

Investors had a hope that the markets could stabilize. Jack Ablin, chief investment officer at Cresset Capital Management, said the move may have been exaggerated by a lack of liquidity on Friday, with many participants out for the Thanksgiving party.

“My first reaction is that everything we are going to see today is exaggerated,” Ablin said.

Reporting by Saqib Iqbal Ahmed; Additional reporting by Chuck Mikolajczak, Megan Davies and Lewis Krauskopf; Author by Ira Iosebashvili; Edited by Megan Davies, Richard Chang and Alexander Smith

Our standards: Thomson Reuters Trust Principles.