Here we go again…

The Omicron Variant is reportedly spreading around the world from a starting point in South Africa and it may be resistant to all the vaccinations. On the Friday after Thanksgiving that sent a huge shockwave through financial markets that put up some volatility numbers that were bigger than anything we have seen since March 2020. Much of the fear stems from the idea that lockdowns are imminent reminiscent of the summer of 2020 and the Dow Jones Industrial average – as an example – was down more than 1000 points for much of the short trading day. Of course, widespread lockdowns outside of Australia would likely return us to some dismal economic numbers in the near future. Some people are questioning the news saying that governments are claiming this variant is resistant to the vaccines just to cover up the fact that the vaccine efficacy has been shown to wane – sometimes only after a few months. Being pragmatists for the most part, we don’t like spend time on theories such as this, we just notice that the lockdowns may be fact. It looks like the Israelis may be the first in shutting down air travel from foreign countries. Mapping out details on that out will be a moving target as the situation progresses but stay tuned because this could start to get serious.

As far as the market’s reaction to the news on Friday, the VIX (volatility numbers) rocketed higher. This is not a huge surprise considering the continued uptrend in markets and real lack of “put buying.” This means that, by some historical measures, there was less insurance being bought by fund managers for the potential of a downside market move was at a very low number historically and near the low Year-To-Date. The VIX rocketed more than 50% in one day – this chart gives an indication of the fear that ravaged the market on Black Friday.

Clearly the stock market was overdue for a little “shaking of the tree” so to speak. Are the markets telling us there is more bad news coming and the Black Friday pullback was actually the start of something worse? At this point we don’t see that and the huge pullback in crude oil is one data point that is actually good news. As we have mentioned in previous weeks – we have a hard time believing that inflation is rampant and getting worse when we see charts of bonds rallying and commodities like gold and crude oil selling off. Well on Black Friday, crude oil sold off about 14% !!! That’s right an enormous move down in one of the big inflation-indicating assets. That is only one data point, so we have to remain diligent – maybe someone cracked the code on the “Holy Grail” of energy and figured out cold fusion on Friday. We doubt it. Friday’s selloff probably doesn’t mean the asset rally of the “everything bubble” is over yet – but if that move ruined your holiday weekend, it is time to reduce risk. The new Covid variant could turn out to be more than we anticipate – but only time will tell. Regardless of how serious the Omicron variant truly is, we are guessing volatility stays elevated for the foreseeable future – so stay tuned!

Regards and good investing,

Greyson Geiler