Summary

The article discusses the impact of the Omicron variant on financial markets, offering insights into market reactions, potential buying opportunities, and sector-specific impacts.

Abstract

The emergence of the Omicron variant has led to a significant downturn in global financial markets, reminiscent of previous COVID-19 waves. The article highlights the immediate effects observed on Black Friday, with substantial drops in both stock and crypto markets. It suggests that while the situation is uncertain, the market's reaction presents a potential buying opportunity, though perhaps not as severe as the initial COVID-19 market crash. The author advises caution and patience, recommending a dollar-cost averaging strategy for investing during market pullbacks. The piece also speculates on which sectors may outperform or underperform as a result of the new variant, with stay-at-home and big tech stocks potentially benefiting, while travel, finance, and industrials may suffer. The article concludes by reminding readers that market uncertainty is likely to persist until more is known about the Omicron variant's impact.

Opinions

The author believes that the market sell-off due to the Omicron variant is a buying opportunity, but not as extreme as the March 2020 correction.
A market correction of 10-15% is considered a good entry point for investments, with the author leaning towards a 10% correction being more likely.
The author did not invest immediately following the market pullback, anticipating further sell-offs in the coming month.
Dollar-cost averaging is the preferred investment strategy during market downturns, as timing the market bottom is seen as nearly impossible.
December's historical market performance and the Santa Claus rally could positively influence market trends despite the Omicron variant's impact.
Sectors expected to outperform include home media, home improvement, social media, big tech, and pharmaceuticals, while financials, travel, industrials, and materials may underperform.
Real estate is not anticipated to be significantly impacted by the Omicron variant, according to the author's perspective.
The author emphasizes that market uncertainty will continue until more information about the Omicron variant is available, potentially pausing the bull market and increasing volatility.

How To Navigate the Omicron Variant’s Impact on the Market

What to expect and buying opportunities

We’re over one and a half years into the COVID-19 pandemic. As a result, we now have a better understanding of how a new variant will impact financial markets.

On Friday (11/26) the stock market was down significantly as news of the omicron variant and lockdowns circulated. The S&P 500 was down more than 2% and the Dow had its worst day of the year, down 2.5%.

The crypto market also sold off. Bitcoin was down 9% while Etheruem was down 10%.

From experiences dealing with the initial COVID wave and previous variants, we have a decent roadmap to help navigate us through this variant.

What Happened Friday

Before getting into what might happen in the future, a quick look at what transpired Friday.

On Friday, the World Health Organization deemed a new strain from South Africa a variant of concern and named it omicron.

The United Kingdom, and later the U.S., temporarily suspended flights from several African countries because of the variant.

And there were financial implications as a result.

First, oil had its worst day of the year Friday, falling below $70 a barrel, as reduced travel means less demand for oil.

Stocks related to travel and oil took a big hit. Cruise lines such as Carnival and Royal Caribbean were both down more than 10%. Airlines such as United Airlines and American Airlines were down around 9%. Oil companies Chevron and Exxon Mobil were also down.

Banks were also down due to fears of economic slowdown.

Not all industries had a bad Friday though. Vaccine makers Moderna and Pfizer were up big, as were stay-at-home stocks like Peloton and Zoom Video.

Lastly, bond yields fell. (Bond yields and bond prices move inversely.) Bond prices were up from increased demand as investors moved into bonds for their less risky nature and secure payment.

What to Expect Going Forward

Market sell-offs are always a good buying opportunity. But it's important to know how much more the market can sell off before buying in.

We won’t see a 30% correction like we saw in March 2020 when COVID first began. A 10–15% correction would be a nice buying opportunity, especially since prices currently aren’t too far off their all-time highs.

I personally don’t see a correction of more than 15% coming, if anything I think it would be closer to 10%.

Because not much is known about the variant yet, it's hard to tell what exactly will happen. As a result, I did not buy in Friday when the market pulled back. I think there are still some more days of selling off in the next month.

My favorite strategy when the market pulls back is to dollar cost average into positions. I will start to do that if the market continues to fall over the next month — timing the bottom is almost impossible.

December is historically one of the least volatile and best performing months of the year, especially during the last few trading days of the year. So it will be interesting to see how these two factors play out.

As Friday alluded to, it makes sense to think some sectors will do well from the omicron variants while others will do poorly.

Some potential overperformer options include,

Home media: Netflix, Disney, Roku
Home Improvement: Wayfair, Home Depot
Social media: Snapchat, Twitter
Big tech: Google, Amazon, Microsoft, Apple
Pharma: Pfizer, Moderna

Some potential underperformer industries include: Financials, Travel, Industrials, and Materials

There are many strategies to play these scenarios. During the March / April 2020 sell-off I was able to buy shares of United Airlines at an extreme discount and make a quick profit.

Real estate prices were up big in 2020, as people spent more time at home and gave more value to real estate. I do not anticipate the omicron variant to have that much of an impact on real estate, but I am not as involved in real estate. I simply use Fundrise for the real estate of my overall portfolio.

More still needs to be known about the variant, in terms of the political and economic impact it will have. Markets don't like uncertainty, so until things are figured out, the bull market may pause and volatility may reign supreme.

The above references an opinion and is for information purposes only. It is not investment advice.