These latest coronavirus concerns are leading traders to wonder if this is finally the end of the long-standing bull market. Comments by Federal Reserve Chairman Jerome Powell about inflation didn’t help either.
The CNN Business Fear & Greed Index, which measures seven sentiment indicators, has plunged back into fear territory in recent days and is not far from extreme fear levels. Just a week ago, the index was showing signs of greed.
Suddenly investors are worried again about the virus – and if it is going to derail the economic recovery and change plans the Federal Reserve must start cutting its stimulus programs.
Still, investors should keep in mind that even with the recent bout of volatility, Wall Street is still having another incredible year.
The S&P 500 is up almost 25%. The Nasdaq also gained more than 20%. Investors flock to the perceived security of mega-technologies such as Apple (, )Microsoft ( and owner of Google )Alphabet (. )
Is Omicron going to derail a year-end rally?
Plus, December is often one of the best months of the year for stocks. Consumers are shopping for the holidays and businesses are spending what is left of their annual budget.
This usually leads to healthy fourth-quarter earnings – and investors often try to get ahead of that by stocking up on stocks before companies release results in January and February.
“It’s generally a good time for the market, but the variant has started a curve and things are changing right now,” said Jimmy Chang, chief investment officer for the Rockefeller Global Family Office. “There could be a rally of relief at the end of the year, but we are currently in a waiting pattern. “
So will concerns about the Omicron variant shake up what is usually a strong holiday rally? The problem is, experts still don’t know how bad it will be, although some are hoping it will be a fleeting concern.
“The trajectory of the virus still matters. But having said that, the base case is that it turns out to be limited disruption, ”said Eric Winograd, senior economist at AllianceBernstein.
“The hope is that we don’t go back to the March 2020 shutdowns. We have learned as a society to live with the virus and that has made the market and the economy more resilient,” Winograd added. “I don’t expect the variant to reverse the progress that has been made. “
Wall Street launches another tantrum
But investors have other concerns, namely the evolution of the view of inflation by the Fed.
Powell said in testimony on Capitol Hill on Tuesday that it was time to “remove” the word “transient” when it comes to describing inflation. He also suggested that the Fed may speed up plans to pull out – or cut back – bond purchases that have helped keep long-term rates low.
This helped fuel Tuesday’s stock sell-off. Investors are interpreting Powell’s comments as a sign that the Fed may look to raise interest rates more aggressively at some point next year, even if concerns about Covid remain.
It’s almost like a repeat of the infamous “taper tantrum” that rocked the markets almost a decade ago, when Fed Chairman Ben Bernanke was about to withdraw the post-Great Recession stimulus.
Chang said the Fed’s stance may be less favorable to the market as a whole, and in particular for meme stocks such as GameStop and AMC which have skyrocketed in part due to the Fed’s rate cut to zero in 2020.
In other words, investors are now increasingly worried that the Fed is pulling the proverbial punch bowl just as the economy begins to slow. There are no more Covid stimulus checks on the Congress horizon either.
“In the last two years there has been unprecedented budget support, and this is not going to be repeated and monetary support will also disappear,” Winograd said.
With that in mind, he believes economic growth should return to a more normal rate of around 2% a year, and after several years of strong stock market performance, investors have yet to take that into account.
“This slowdown could make it a more difficult market,” Winograd said. “You don’t have to go too far to predict that stocks won’t go up another 25% next year. ”