Friday was yet another reminder of how quickly things can change in life and in markets. The Omicron news is concerning, so it’s natural for markets to react sharply as investors take in new information. Stock markets were down sharply on Friday with the Dow down 2.5% and the S&P 500 down 2.3%. The price of a barrel of oil also fell more than 10% on the day.
It’s also useful to remember that first reactions aren’t always the right ones.
From what I read over the weekend, it sounds like we don’t know the answers to a number of important questions, like how transmissible it is, how sick people get with this variant, whether the vaccines or immunity from previous infections work, and how long it might take for drug companies to come up with other vaccines or boosters if that is needed.
Those scientific questions will probably take some time to answer, and while we’re all bracing for bad news, we might find that it’s better than we expect right now. As scientists get answers (or at least, preliminary indications), policy-makers will start to form a response.
And all the while, markets will price in the new information – every moment of every trading day. So, it’s fair to expect volatility while this all happens given that none of us know where the virus is heading, especially in the short run. As I write this, stock futures are up over 1% and oil has recovered half of the previous trading day’s losses.
In the medium and long run, it seems to me like the last 20 or so months could provide somewhat of a blueprint for how to manage ourselves in our personal lives and with respect to our investments.
I thought the market would follow the virus when this started last year, but that turned out to be wrong. Markets sold off in response to the global economic shutdowns and recovered when the government stepped in with monetary and fiscal policy. As people went back to work, and then regular life more or less, markets continued to get even better.
I’m not saying that history will repeat itself exactly – we may not shut down, the government may not step in, and as I said above, we may find that Omicron isn’t any harder to deal with than the Delta variant.
We just don’t know, which is why we take a balanced approach for our clients. Yes, we all lost money when markets sold off last year, but the losses on the stock side of the portfolio were blunted by gains from the bond side. And, when the recovery took hold, the opposite occurred – and we rebalanced throughout when appropriate.
And, that’s what we’ll continue to do as the scientific community tries to figure out what to make of Omicron. Given that our investing time horizons are generally measured in decades, we should have answers to these questions in relatively short order. The day-to-day may feel like an eternity when markets are swinging wildly, but the trick is to keep your eye on the long run.