It would be nice to say that the Omicron fall-rebound-fall pattern holds a deep lesson on investor biases, the overextended state of the market or the tendency of the market to ignore obvious risks and then panic.
Unfortunately, the explanation for the scale of Friday’s fall and Monday’s partial rebound is prosaic: Something potentially very bad happened, the discovery of a variant of Covid-19 that spreads fast and might be able to evade vaccines.
True, Friday’s trading had a touch of panic, as investors followed the lockdown playbook that worked so well last March.
Investors are just like everyone else: We all knew a new vaccine-resistant variant was possible, we all hoped it wouldn’t happen, and we all worried about it when it seemed it might have happened.
The dollar dropped sharply as a result, with the haven of the Swiss franc having its best day in three years and the Japanese yen doing well.
All the stocks that were up on Friday were Covid winners, led by vaccine-makers Moderna and Pfizer, disinfectant maker Clorox and a slew of healthcare, consumer staples and home-entertainment companies.
Travel and shopping stocks made back their losses and more, led by soaring cruise line stocks, while Clorox plunged more than 10% and healthcare and consumer staples fell back.
None of that made much difference to the moves on Friday and Monday, which were about investors reassessing the outlook for lockdowns, growth and monetary policy in the face of the new variant.
Some people wonder why the market reacted at all to the arrival of something that everyone had known was likely at some point.
Second, markets price probabilities; if something is sure to happen in the next 10 years, but we don’t know when, it might be only 10% likely to happen this year.
It’s good that prices are driven by attempts to assess fundamentals, rather than purely by worrying about whether everyone else is going to panic.
There were signs of this early on Tuesday after Moderna Chief Executive Stéphane Bancel told the Financial Times that vaccines were likely to be less effective against Omicron.
If it turns out to be mild, or at least no worse than existing variants, investors can get back to focusing on inflation and the prospects for rate rises next year.