The Omicron variant challenges the “buy-the-dip” mindset

Thoughts

• Markets look to bounce back from a sharp selloff last Friday that saw the worst day for the S&P 500® Index since February. The weakness was driven by concern over the Omicron variant but was exacerbated by thin market trading due to the Thanksgiving holiday. Breadth was historically bad, with the Advance-Decline Index showing the 30th worst day on record with a two standard deviation event. Markets saw a flight to quality, with the 10-year Treasury yield dipping below 1.50% but has since rebounded. Oil prices dropped 10%, with the worst day of trading since April 2020 on lockdown concerns ahead of this week’s OPEC+ meeting.
• This week will be instructive to see if the buy-the-dip approach by investors is still in play, or if markets are vulnerable to a more significant pullback. Days with the breadth weakness of Friday and 50% spike in VIX have historically led to strength over the following month. Friday saw more than $2 billion in retail inflows, the second largest daily inflow on record, though Friday’s decline wiped out $2 trillion in global market capitalization.
• This week will challenge the “buy the dip” narrative and could set the stage for the tone for the rest of the year.

News

• The Omicron variant is the latest concern for investors, with concern over increased transmissibility and lower vaccine efficacy. The Biden administration and Dr. Fauci are pushing the booster as a mitigation plan, though a vaccine tailored to the variant will not be available until early 2022. Officials in South Africa (where the first cases were observed) have noted that cases were more mild than previous variants, though it is a reminder that COVID will likely remain with us for an extended period. Countries are announcing travel restrictions, including the U.S. restricting travel from South Africa and seven other countries, though there seems to be little widespread appetite for the return of lockdowns. Economists have noted the declining sensitivity of economic data to restrictions.
• Consumer activity remains robust, with Black Friday traffic surging 48% from last year’s pandemic-affected level, though traffic remains 28% below 2019’s record. Retailers will benefit from lower level of promotions given thin inventories. Online spending was disappointing at $8.9 billion, down from last year as supply chain concerns have shoppers prioritizing in-store purchases to avoid shipping delays. This is also expected to lead to front-loading of purchases.
• Congress returns from break this week with a full agenda. Federal spending authorization expires on Friday, though a continuing resolution is expected to pass to avoid a shutdown into next January. The debt ceiling looms, with an estimated deadline of December 15, with Republicans continuing to insist that the Democrats pass it unilaterally, though the debate is far from over. Democrats hope to pass the $2 trillion Build Back Better bill by the end of the month, but objections from key moderate Democrats could push the vote into 2022.

What to Watch

• A busy week awaits, with Fed Chair Powell set to speak several times, along with other Fed officials, including Williams, Clarida, Daly, Bostic, Barkin and Mester. Economic data include pending home sales on Monday, consumer confidence on Tuesday, the Fed’s Beige Book on Wednesday, and the monthly payroll report, PMI data and durable goods on Friday.