The identification of a new Covid-19 variant labeled Omicron, with several mutations that indicate existing vaccines could be less effective, drove a pull-back in risk assets last week on concerns that it may be more contagious than Delta. All major U.S. indices were down over 2% in Friday’s trading with thin post-holiday liquidity exacerbating the sell-off. For the week, the S&P 500 and Dow Jones ended down by 2.2% and 2.0%, while the tech-heavy Nasdaq Composite, which had been pressured lower by rising rates before the variant news, fell 3.5%. Meanwhile, energy prices dropped sharply with crude oil prices down 13% on Friday alone.

While it is still too early to draw firm conclusions as new information continues to come to light on the Omicron variant, here is a brief roundup of what we know so far and the implications for financial markets.

• The World Health Organization has declared Omicron as a “variant of concern” due to initial indications of higher transmissibility and greater risk of people being infected with Covid-19 for a second time.
• Omicron has an unusually high number of mutations. Around 50 mutations have been discovered so far, including 30 mutations in the spike protein, the structure that the virus uses to attach to human cells, which improves its ability to evade vaccines and the body’s immune response. The Delta variant had around 15 spike protein mutations, for perspective.
• The variant was first identified in South Africa, where it has spread rapidly, and cases have begun to be detected throughout Europe, though the Delta variant remains the dominant strain there, as well as a few in Asia. Many countries have begun to institute travel bans, primarily focused on countries in southern Africa where the Omicron strain is prevalent, though some, like Israel and Japan, have closed their borders to non-citizens altogether.
• The doctor from South Africa who first sounded the Omicron warning, Dr. Angelique Coetzee, has described symptoms of the new strain so far as being “extremely mild”. However, it will likely take several weeks to get a more complete picture with supporting data on the severity of the strain and the effectiveness of current vaccines.
• Moderna CEO, Stéphane Bancel, has stated that there is likely a material drop in the effectiveness of current vaccines against the Omicron variant. He also cautioned that it would take months before vaccine manufacturers could produce new Omicron-specific vaccines at scale. However, current vaccines still are expected to provide some level of protection, particularly when it comes to severe illness/hospitalization.
• The CDC urges all Americans to get vaccinated and get boosted to fight the new strain.
  

Markets initially bounced back in this week’s early trading on indications that symptoms for the new variant so far are mild, but volatility is continuing as new information is released. Sentiment rebounded further on an announcement from President Biden that the U.S. won’t need new lockdowns this winter, despite the renewed risks. At the same time, the large amount of cash sitting on the sideline has continued to support large inflows to equities to buy the dips, a theme that’s been on display throughout 2021. On Friday, there was over $2 billion of retail inflows to stocks, which was the second largest daily inflow on record, according to Vanda research.

At this stage, much remains unknown or unconfirmed about Omicron, so we would caution against premature conclusions on the economic and financial market impact. There are valid concerns that this may provide yet another setback for global supply chains given news of increasing travel restrictions. If it does impact the outlook for economic growth and inflation, it may also have implications for the pace of monetary policy normalization from the Federal Reserve. However, it remains too early to say for certain. Our team at First Merchants Private Wealth Advisors will continue to monitor the situation closely and will keep you apprised of new developments and the implications for financial markets and investment strategy.

For additional perspectives as we close in on year end and look out to 2022, we will be sending out a separate email tomorrow with a video update from our team covering topics such as Gift and Estate Tax Opportunities, Charitable Planning, Inflation and Tech Volatility. We welcome you to listen in and to reach out to your advisor with any questions.