Early Take on the Omicron Variant

This morning on Face the Nation, Dr. Scott Gottlieb asked four important questions which we will learn the answers to in the coming weeks.

1)      Is the Omicron strain of Covid more virulent than previous strains?
2)      Does this strain escape immunity?
3)      Does this escape from immunity increase transmissibility?
4)      Do vaccines, including boosters, and previous infection help prevent severe infection from Omicron?

Omicron has likely been circulating across the world for several weeks, with some estimates tracing its roots back to late September. As reported, it is a heavily mutated version of Covid, particularly as it relates to the vaunted spike protein.  Prognosticators believe this could make it better at hiding from our immune system than previous variants.  That said, the scientific community needs more time to properly test the above questions, so we will continue to monitor the situation.

What we do know is that we are in a much different situation than we were in March of 2020.   First, the world is responding much faster to the Omicron strain.  Countries and global governing bodies appear to be better coordinated with the collection and distribution of information.  Second, the world has better immunity to Covid 19 after 20+ months of global circulation.  Between actual infection and vaccines, a significantly higher percentage of the world has had some exposure to Covid (even if global vaccination isn’t as high as experts would like, it’s still far more than zero).  Third, the scientific community has made substantial progress in developing vaccines and treatments.  Both Pfizer and Moderna are already working on their next booster to specifically protect against Omicron, and it’s likely a matter of months, not nearly a year before booster availability.  We also have effective therapeutics such as Regeneron’s monoclonal antibodies and Pfizer and Merck’s new antiviral pills. 

This doesn’t mean that Omicron isn’t a serious threat, but it does mean that we’re unlikely to witness the same timeline of uncertainty we saw during the initial outbreak or even the Delta variant.  We should have a lot more information, a lot sooner, and should be better prepared to continue the progression from a global pandemic to a more normalized endemic disease.     

The markets certainly did not take that view on Friday.  With much of the US still digesting their Turkey dinner, stocks sold off 2.5%, Oil was down 13% and Treasury bonds rallied substantially, taking back much of their inflation related sell-off.  We also saw a reversal back to the “work from home” trade.  Stocks like Zoom, Peloton, and Teledoc, which are in major correction territory, staged big rallies.  The expectation here is that Omicron will lead to lock downs, office closures, and a return to the zombie Covid winter. 

With these stocks still in correction territory and the outbreak of Omicron, is now our time to join the trade?  The short answer is probably not.  Valuations are still too high, and it is difficult to unearth where the incremental growth comes from.  Most businesses already made their Covid back up plans, and most employees are already on Zoom.  You’re still just as likely to see somebody selling their Peloton as you are to find a new diehard fan.  Competition is increasing daily, and it is far more likely that growth will continue to decelerate in many of these businesses, even if they get a mini Omicron bump.

The more interesting question is what does this short-term uncertainty do to the inflation picture?  Does a temporary economic slowdown allow the supply chain congestion to unwind?  Is Friday’s sell-off in oil enough to slow the Fed’s plan to reduce their balance sheet?  Will we start to hear from politicians about the need for further bailouts?  Our crystal ball is quite murky when it comes to inflation in general, and it is even cloudier with all these potential puts and takes. 

With so many question marks, our focus heading into the last month of the year will be on only what we can control, while in the back of our minds knowing that we are much better prepared for whatever Omicron brings.  From a financial planning standpoint, we’ll look for opportunities to realize losses and rebalance portfolios after a year of substantial gains.  There may also be opportunities for more advanced tax strategies such as Roth conversions. 

The benefit of buying mostly large capitalization companies with strong balance sheets and cash flow is that if either Omicron ends up worse than feared or if it’s a head fake leading to further inflation, our companies will be able to weather the storm.  If the sell-off intensifies, we’ll do what we’ve always done.  Sell some of our outperformers and buy what’s taken the biggest beating.  It’s a far safer game plan than participating in the parts of the market with rampant speculation, heavy leverage, and an expectation that the “more of the same” trade continues into perpetuity. 

We hope everyone had a wonderful, relaxing Thanksgiving with family and friends.  We also hope (at least Jason hopes) that everyone had a chance to watch Michigan finally beat Ohio State. Go Blue!

_{Compass Wealth Management LLC is a SEC registered investment advisor, clearing transactions primarily through Pershing Advisor Solutions and Pershing LLC subsidiaries of Bank of New York Mellon Corp. This letter is written by Compass for the benefit of its clients and does not necessarily represent the opinions of its affiliated organizations. It is based on information believed to be reliable, but which is not guaranteed to be correct. Nothing herein shall be construed to be a solicitation to buy or sell securities, indicate that past performance is predictive of future returns, or recommend individual investments.}