With markets at all-time highs and valuations stretched, it not surprising for pullbacks and bouts of volatility to occur. On Friday, the S&P 500 experienced its worst single-day pullback since February falling -2.3% on concerns of the potential economic impact from the newly discovered Omicron variant of the Covid-19 virus. Oil and travel-related stocks were particularly hard hit as fears over potential lockdowns and travel restrictions regained traction. Much is not currently known about this variant, including the vaccines’ effectiveness in preventing severe illness, but we can expect a stream of information over the coming weeks.
So, how do we invest in periods of such uncertainty? For one thing, it is important to recognized that we are always investing in uncertain environments – some are just more uncertain than others. In other words, there is always something to worry about. History tells us that knee-jerk reactions motivated by fear are typically overreactions and are often the wrong decision over the long run. We created below a chart of the S&P 500 and listed the many worries since 2008 cited by market participants as reasons to sell and go to cash. In hindsight, those worry-driven pullbacks were actually “buy” signals.
From a financial planning perspective, the worst thing an investor can do is to sell out of substantially all of their equity positions. The damage that is incurred to the wealth creation process by “going to cash” in our experience tends to be extensive because that same investor almost always misses the market rebound, which is when the best risk-adjusted returns are often made.
Fear and greed are the greatest enemies in investing. Fear is particularly pernicious. So, how should we think about investing in uncertain times? We rely on our in-depth research process to develop a framework for assessing market risks and then make tactical adjustments to our investment models. Our primary research on the global economy enables rational and informed decision-making.
Included below is the framework we developed at the beginning of the Pandemic. The three-legged stool that would create the conditions for an economic and market recovery required both Monetary and Fiscal policy stimulus and some containment of Covid-19. The Fed and the Federal Government swiftly delivered the first two legs of the recovery. We did not know then what we now know now, of course, but we believed that the scientific and medical communities would eventually develop drugs, procedures and strategies to enable society to ultimately return to normal. As the Pandemic matured, these developments did in fact occur enabling the continuing re-opening of the economy.
Given how long and far society has come from the grim days of March 2020, it is not surprising that the Omicron variant news could be viewed as a potential economic setback and reignite fears of restrictions. It is promising to note that early indications are that this variant may cause “extremely mild” symptoms, according to South African doctor Dr. Angelique Coetzee who was interviewed by the BBC on Sunday. Additional data is required, and we will surely get it.
Time will tell what if any economic damage this variant may bring. Much of that will depend on how governments around the world respond. Extreme lockdowns under “zero case” policies like those adopted in China, for example, are possible but increasingly unlikely due to increasing opposition by businesses and citizens.
Looking to the recent Delta-variant wave that hit the U.S. as a precedent, by nearly every economic measurement there was very little damage done to the U.S. economy. Personal spending increased sequentially in each month of that wave. Certainly, some impact will be felt. The travel industry, - international travel, in particular - could be impacted if travel restrictions are reinstated more widely.
While we wait for more information on the Omicron variant and eventual government responses, we can be assured that the Fed is closely monitoring the situation. With interest rates still near records low and real interest rates still negative, there is significant support for both the financial markets and the economy.
Disclosures
INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS OR INVESTMENT STRATEGIES. BLOOMBERG IS THE SOURCE OF MARKET DATA. INVESTMENTS INVOLVE RISK AND ARE NOT GUARANTEED. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RETURNS. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.