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One of the Biggest Questions About Omicron Was Just Answered. It’s Bad News for Stocks.

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A woman gets a Covid-19 vaccination at a walk-up site in Washington, D.C., on Monday.

Jim Watson/AFP via Getty Images

One of investors’ most pressing questions on Omicron, the new Covid-19 variant, got a preliminary answer on Tuesday. It’s a scary development for stocks.

The emergence of Omicron, a heavily mutated version of the virus that is expected to be more contagious than other variants, has roiled the stock market. The

S&P 500
has fallen more than 2% from the record high it hit in late November, just before Friday’s news that the variant was found in South Africa

This could be just the beginning of the selling, as investors now have key information they were hungry for. An RBC survey published Monday found that investors were most concerned about how severe, or mild, infections caused by the Omicron variant might be. That isn’t known yet, but data on the question that ranks second—how effective vaccines and antiviral drugs will be against the variant—has begun to emerge.

Tuesday,


Moderna

(ticker: MRNA) said its vaccine may not be very effective at immunizing against the new variant and


Regeneron Pharmaceuticals

(REGN) said its treatment will be less effective than it is against other variants.

Before investors received that news, they were generally sticking with their prior positions, leaving their portfolios untouched. Just under half of respondents to RBC’s survey said they were doing nothing with their portfolios. The second-largest group, at 7%, said they were selling stocks of lower-quality companies.

Stocks rebounded Monday following Friday’s rout, but have headed lower in response to the Moderna and Regeneron news. The

Dow Jones Industrial Average,
the

S&P 500,
and the

Nasdaq Composite
were all down by more than 1% Tuesday.

“There is certainly the potential for additional market drops and heightened volatility in coming weeks as a result of this variant, especially given all the uncertainty surrounding it,” wrote Kristina Hooper, chief global market strategist at Invesco. 

There is a positive wrinkle in all of this: If the damage from the variant is so severe that the Federal Reserve has to delay its unwinding of its monetary stimulus program, stocks could resume rising. If “Omicron is potent enough that it will delay Fed tapering and rate hikes, the market would embrace that as a positive (beyond some short term volatility),” wrote Tom Essaye, founder of Sevens Report Research. “The market would still assume that within months new vaccines would be released, while the Fed would remain on hold.” 

But that isn’t what is happening right now.

Fed Chair Jerome Powell told a Senate committee Tuesday that the strength of growth, and the degree of inflationary pressure, could prompt the bank to speed up its reduction of the monthly bond purchases it began in 2020 as a way to help the economy weather the pandemic.

A faster reduction in bond buying would drag bond prices down and lift their yields. That could crimp economic growth by making it a bit more expensive to borrow money.

A faster tapering, or scaling back of bond purchases, could also mean the Fed will raise short-term interest rates sooner than it had intended—a further blow to economic growth. Investors certainly don’t want to see less economic support if Omicron forces countries to implement more lockdowns or travel restrictions. 

The stock market has a lot to deal with right now. More pain is certainly in the cards. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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