Investors confused by Omicron and Fed
Current drawdowns can create opportunities
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It has been a very tough week on markets, and investors have been overwhelmed by two main factors:
Omicron variant
Jerome Powell testimony at Senate
Those 2 events had a big impact on markets and the S&P 500 closed November with a negative return for the first time since 2011.
Omicron: dangerous or not?
The news about the new Covid variant in few minutes has terrified the world and the markets. Just look the number of headline about that.
As the number of Covid cases is rising in many countries, the new variant is a cause of concerns.
You can even see the effect on markets.
The fear of possible new restrictions sent down almost every stocks. When you are terrified it is more likely you sell everything, and that is exactly what happened.
After an initial powerful and widespread sell-off, usually investors (the smartest) start to weight the real potential effect of the events and they start to reallocate their funds, based on the new assumptions.
But what could be the new assumptions? Is the Omicron so terrible?
The answer is “we don’t know”, but now we know what some experts think.
On Tuesday, Moderna CEO told he has doubt on vaccine efficacy for Omicron variant and he said that a new adjusted version of the vaccine could be needed, and it will take few months to be ready.
On the other side, from Pfizer, Biontech, and the WHO arrived more reassuring statements. Just yesterday, a Pfizer VP said to Bloomberg TV that “We don’t expect that there will be a significant drop in effectiveness”, but “We will have the data in the next couple of weeks”.
I think that there is a high possibility to see Omicron becoming the dominant variant (based on South Africa data), but for now there are no signs that vaccines will not work properly with that. Of course it is very important to stay updated everyday, because more data will arrive and the situation will be more clear in the next days.
Moreover Dr. Coetzee, who first warned authorities on the new variant, said that Omicron seems to have “mild symptoms”.
Did Powell just become hawkish?
The other big event of the week has been the testimony of Powell and Yellen to the Senate.
The Chair of the Federal Reserve, recently re-appointed, made two very unexpected statements:
Talking about inflation, always mentioned as transitory, he said “I think it's probably a good time to retire that word (transitory)”.
The Fed just began tapering, reducing the purchase of Treasuries and MBS, but Powell said “we are actually at our next meeting in a couple of weeks going to have a discussion about accelerating that taper by a few months”.
The two statements are both very hawkish and even very different from Powell previous conferences.
I see this change of tone as a much relevant factor for markets if we look at the next few months.
Where to invest now?
There could be big swings in the next weeks, because surely the situation of Covid will worsen (due to seasonality), and the uncertainty about Omicron will remain.
But opportunities will come.
An example of big swing? Look at WTI (crude oil) and its 20% drawdown:
Even the 10-Year Treasury Yield decreased heavily:
Right now I believe that Omicron variant will not derail the recovery and will not bring to extreme and catastrophic scenarios (and I even hope so!). For this reason I would start from now to make some small purchase of equities (or better I will buy the dip).
There could be more pain in the next days, but I see any further fall as a buy opportunity for equities. But what to buy? US? Europe? Asia? Value? Growth?
To give an answer I think that we need to think about another big theme: will JPow really be more hawkish? I am a bit doubtful about that, but it is better to be ready for everything.
A less severe virus and a more hawkish FED go in the same direction: Reflation trade.
In that case, the most interesting stocks to watch will be: cyclical and value stocks.
To be more precise I am starting to look again with interest to stocks of oil producers, financials, payment services, industrial, infrastructure, materials.
Which index to buy? Of course it is good to invest in S&P 500, but maybe there is some more speculative play to take. I am talking about the Dow Jones and the Russell 2000 Index.
After a false breakout, the Russell is back in the box, and now it is in the lower bound. It is a risky play, but I see an interesting entry point.
The Dow Jones instead is more positively correlated to the economic cycle and could overperform the other indices for few weeks/months.
Moreover, European indices have been hammered a lot, but the pandemic is hitting severely some area more than others and there are some bright spots (for now). The best ideas in Europe are: Italy, France and UK. There are lot of ETFs to invest in those countries (like EWJ, EWQ and CWI).
What about tech stocks?
I see some opportunity even in tech companies, but I am just staying away from stocks with extreme multiples. I see more pain coming for companies trading more than 10x their expected revenue!
Better to chose quality companies at reasonable valuation (Facebook is a good example). Don’t be too greedy!
Remember: this is not a financial advice! Make your analysis before to make any investment!
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Have a great weekend!
Market Radar
Disclaimer: Market Radar is not an investment advisor. Any information provided as part of the services is impersonal and not specific to any person’s investment needs. You acknowledge and agree that no content published or otherwise provided as part of any service constitutes a personalized recommendation or advice regarding the suitability of, or advisability of investing in, purchasing or selling any particular investment, security, portfolio, commodity, transaction or investment strategy.
What about Enel? Price is near 52week low 🤔, discount or bad chiose for our Wallet ?