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Markets Sell Again: Omicron, the Fed & More

The Omicron variant of Covid-19 is changing the calculus of the global economy.

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This story originally appeared on Zacks

Monday, December 20, 2021

Pre-market futures are down big to start a holiday shortened trading week, following a big sell-off Friday. The Dow, which fell roughly 1 1/2% Friday, is down another -440 points this morning. The S&P 500 is down another -65 points at this hour, closing out last week in the red. The tech-heavy Nasdaq has been seeing the biggest gouges of late, chopping out lots of speculative valuation, and trades down -250 points right now. The Nasdaq fell a full -3% last week.

The Omicron variant of Covid-19 is changing the calculus of the global economy. We’re already seeing airline cancellations in this country, and a fresh outbreak everywhere would go back to constricting supply chains again. A new massive Covid variant may bring big headwinds on the demand side as well as the supply side, and that’s why the down-trade continues this morning.

The jury is still out on Omicron, however. Some foremost authorities on Covid from the earliest days of the pandemic see a scenario where the highly infectious — but perhaps less severe, especially among the vaccinated population — variant burns through the U.S. quickly, bringing with it a blanket of immunity for those having been infected. It will again be a huge strain on hospitals and healthcare in general, but is far less likely to warrant another economic shutdown. We still have plenty to learn about Omicron, however -- none of this is a sure thing.

We also look back to the Fed’s decision last week toward quickening the taper of asset purchases. In different, more “normal” economic times, we might have equated our latest bout with market bearishness as being directly affected by the Fed taking away the honey pot, albeit slowly. If we happen to see economic growth pulling back while prices remain high, that’s “stagflation” — and something within the Fed’s wheelhouse to deal with: it will have to raise interest rates to flush out inflation if it stubbornly remains, even if Omicron is a short-term issue.

Stagflation must also be fought with new forays into productivity. This was a main initiative of President Biden’s Build Back Better plan, to bring about new employment and family care opportunities to increase productivity among our working population. Unfortunately for Biden from a political perspective, resistance within the split Democratic Party is keeping this plan from going forward at this time. Thus we remove an arrow from the quiver in our ability to attack stagflation. Perhaps the market is throwing a question mark there as well, adding to today’s overall bearish tone.

Beneath our present set of economic concerns sits a bedrock of a very stout, healthy economy. For proof, look no further than Q3 earnings season just ended. We’ll get a revision to Q3 GDP mid-week, which is expected to remain at +2.1%. This is far cooler than the +6.7% we saw in Q2, but includes challenges experienced from the previous major Covid variant, Delta. And if Q3 earnings season was any indicator, we may even see a higher revision for last quarter.

Other than that, mostly just jobless claims are what we’ll be looking at this week, which have also been very good. We’ll take it slow this Christmas Week — or at least not panic-sell into our current market indigestion.

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