Thanksgiving week was going pretty well until the rise of a new COVID variant, Omicron in Africa on Friday, plunged the markets. There are fears that existing vaccines and treatments may be less effective against this mutation. The first three trading days of the week reflected a continued string of better-than-expected economic data, with the Atlanta Fed projecting US fourth-quarter GDP growth to accelerate to an 8.6% annual rate. While the real growth rate is likely to remain in the mid-single digits, it will still be at a very strong pace.
While growth and technology stocks were low before the news, the major reason for the sharp fall in the shares on Friday is the announcement of new variants. Value stocks and banks, which tend to be more financially sensitive, performed well before the Omicron news. In addition, shares related to the airline were down more than 7% on Friday, while those of Stay at Home were higher.
It appears that Omicron is more transmissible than the delta variant, but little is known about the severity of the disease or how it would act in a more vaccinated population. According to Businesshala News, Angelique Coetzee, president of the South African Medical Association, described Omicron’s symptoms as “different and so mild” relative to earlier infections. While this may change as it is still early in the infection, early signs regarding the severity of symptoms and rates of hospitalization are encouraging. Markets will keep an eye on any additional information this week. If the severity of symptoms and hospitalization rates from Omicron remain low, the markets should react positively.
So far, high frequency and nontraditional economic data are not reflecting a change in behavior in the US that would significantly alter the economic outlook. For example, last week was five days with more than 2 million people passing through TSA checkpoints. If people were getting uncomfortable again then air travel would be expected to be an early indicator, but most of that data came after the Omicron news broke.
The trend of high COVID infections in Europe was first marked as a risk in late October and continued last week.
While the US has seen a significant reduction in the pace of Covid infections since the peak of September, the rate of change slowed down last week. The Thanksgiving holiday may have delayed some reporting, so caution should be exercised with the data this week.
While watching Omicron will steal the headlines from its November monthly jobs report, it should still be watched closely as a gauge of recovery in the labor market. Non-farm payrolls are expected to increase by 535,000 for November, and the unemployment rate should improve to 4.5%. The health of the labor market has implications for economic growth and a possible acceleration in reducing asset purchases by the Federal Reserve. There are several communications from Federal Reserve officials on the calendar, with Chair Powell speaking Monday afternoon. In addition, Powell and Treasury Secretary Yellen speak to the Senate on Tuesday and the House on Wednesday.