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In my view, Omicron warrants some level of concern (though not panic). Here’s what we know and don’t know at this point, and my thoughts on some of the potential implications.

 

What We Know

Omicron is a new variant of COVID-19 that was first identified in South Africa, where it’s now the dominant strain of the virus. As of this writing, it has already spread to a number of other countries and regions, including Botswana, Hong Kong, Europe, and Israel. According to initial reports, most of the cases seen so far are concentrated among younger patients, who tend to be either unvaccinated or not fully vaccinated. (For context, South Africa’s vaccination rate is approximately 25%.)

Our healthcare analysts here at Wellington Management tell me that the mRNA vaccine is best positioned to be modified to provide protection from new COVID-19 variants. An Omicron-specific version of the mRNA vaccine could be available in as little as six weeks, but clinical testing, mass production, and distribution of it would likely take up to six months—even for developed countries.

 

What We Don’t Know

Three key questions around the Omicron variant center on: 1) its transmissibility; 2) its virulence; and 3) vaccine efficacy against it. While it’s too soon to have any definitive answers, early data suggest a potential base case of high transmissibility and largely unknown virulence (due to the relatively small number of cases right now), but at least some degree of vaccine efficacy. We should have more clarity on these and other characteristics of the variant by mid December.

Another critical question: Could the Omicron variant usher in a third wave of the pandemic? It’s hard to say with what we currently know, but it’s possible. Much will depend on the above answers. For example, if it turns out to be a less-virulent strain, and if existing vaccines prove even somewhat effective against it, we’d already have a leg up on it (unlike in previous COVID episodes).

 

Macro Implications

  • The global cycle: Omicron fallout could reduce global economic activity to some extent, especially in countries with the lowest vaccination rates and/or the most stringent COVID restrictions. However, I believe the effects will most likely be short-lived, perhaps impacting one quarter of growth. Higher vaccination rates, improved COVID surveillance, helpful anti-viral treatments, and other factors make me cautiously optimistic that Omicron won’t derail the current global cycle and lead to a recession.
  • Inflation: A weaker cycle could put a dent in global inflation from the demand side, but supply-chain disruptions and worrisome labor shortages have also been contributing to higher inflation and could endure for the foreseeable future. They could even worsen if mounting Omicron fears force temporary economic lockdowns or port closures. This is a particular risk in Asia, where there is little to no tolerance for rising COVID cases. Bottom line: Even with some economic slowing, supply-driven inflation will persist.
  • Monetary policy: If supply-induced inflation remains high and demand softens, it could leave global central banks caught between a rock and a hard place. I’ve heard two theories. The one I subscribe to is that policymakers may be a little less eager to tighten policy early on (e.g., in December 2021), which would be a net positive for risk assets.1 The other is that Omicron likely won’t change central banks’ tightening plans due to higher, sticky inflation.
  • Fiscal policy: We could see increased backing for the US fiscal support included in the “Build Back Better” plan, potentially leading to stronger GDP in 2022. There could also be additional support for fiscal stimulus measures in Europe and Japan.

Investment Implications

  • Expect lower liquidity/higher volatility into year-end. As we enter December, I expect liquidity to remain challenged in some global-market sectors, which, in turn, may trigger more bouts of market volatility similar to what happened the day after Thanksgiving.
  • Look at volatility as an opportunity. For longer-term investors, negative news headlines and related market turmoil may present opportunities to add to risk exposures in some cyclical sectors (e.g., travel, leisure, hospitality) and to pare back on more growth-focused sectors such as technology.
  • Consider reviewing your allocations to growth, recession, and inflation scenarios. Do you have appropriate investment allocations to all of these economic scenarios? Do your current risk exposures align with your perceived economic probabilities? If not, consider adjusting them to help hedge your portfolio for a variety of potential outcomes in the period ahead.
  • Near term, expect growth to outpace value and US markets to outperform. Consistent with the market reaction to the Delta variant, in the very short term, I expect growth-style sectors to outperform their cyclical and value-oriented counterparts, and US markets to generally outperform other global regions. I also see the US dollar appreciating and bond yields hovering more or less around their current levels. Longer term, however, I expect the opposite—value over growth and non-US markets over the US.

The views expressed here are those of Nanette Abuhoff Jacobson and Wellington Management’s Investment Strategy Team. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams and different fund sub-advisers may hold different views, and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.

 

What I’ll Be Watching Most Closely

Of all the wildcards at play here, of which there are many, I think vaccine efficacy against the Omicron variant is going to be the most important data point to keep an eye on going forward. Efficacy of more than 50% would, in my view, bode well for further progress on COVID-19 vaccination rates and booster shots, as well as for the resumption of the economic recovery.

 

Talk to your finanical professional about how you can position your portfolio for potential market volatility.

 

1 Risk assets refer to assets that have historically exhibited a significant degree of price volatility, such as global equities, commodities, high-yield bonds, real estate, and currencies.

Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • Foreign investments may be more volatile and less liquid than US investments and are subject to the risk of currency fluctuations and adverse political, economic and regulatory developments. • Investments focused in specific sectors may be subject to increased volatility and risk of loss if adverse developments occur. • Different investment styles may go in and out of favor, which may cause an investment to underperform the broader stock market.

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About The Author
Nanette Abuhoff Jacobson Headshot
Managing Director and Multi-Asset Strategist at Wellington Management Company LLP and Global Investment Strategist for Hartford Funds

Nanette Abuhoff Jacobson consults with clients on strategic asset allocation issues and works with investment teams throughout Wellington to develop relevant investment solutions across asset classes.

The material on this site is for informational and educational purposes only. The material should not be considered tax or legal advice and is not to be relied on as a forecast. The material is also not a recommendation or advice regarding any particular security, strategy or product. Hartford Funds does not represent that any products or strategies discussed are appropriate for any particular investor so investors should seek their own professional advice before investing. Hartford Funds does not serve as a fiduciary. Content is current as of the publication date or date indicated, and may be superseded by subsequent market and economic conditions.

Investing involves risk, including the possible loss of principal. Investors should carefully consider a fund's investment objectives, risks, charges and expenses. This and other important information is contained in the mutual fund, or ETF summary prospectus and/or prospectus, which can be obtained from a financial professional and should be read carefully before investing.

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