Published On: December 7th, 2021|By |Categories: Market Updates, Value|4 min read|

Just over a week ago, few people on the planet had ever heard of the Omicron variant, and yet, today, it appears to be having a major impact on investor expectations. Fearing new lockdowns that had been ruled out as little as a few weeks ago, investors are engaged in a bout of panic-trading based on passing headlines of comments made by some CEO or infectious disease expert. The lack of any definitive analysis of the new variant leaves markets trading in an information vacuum which always leads to heightened volatility.

That said, there are some noticeable differences in the market reaction to the current variant threat when compared to the experience in Q1 of 2020. The chart below shows the performance of two of the poster-stock beneficiaries of the first Great Lockdown. Teladoc (health from home) and Zoom (work from home) commanded a combined market cap of +$184 billion at their peaks. That combined market cap now rests at ‘only’ $68 billion and more notably both stocks have made substantial new lows as news of the Omicron variant has proliferated.

Teladoc (TDOC) & Zoom (ZM) Movements | Mpartners Vermogensbeheer

Source: Bloomberg Finance

This fact may suggest that the current investor angst, based on available information, is not centered on the Omikron breakout, but rather the change in the tone and actions of the main Central Banks – especially that of the U.S. Federal Reserve. Stock volatility picked up after the Federal Reserve chairman commented this past week that officials should consider removing pandemic support faster and that inflation was no longer ‘transitory’. As we have written before, it is important to recognize that high inflation has historically become an equity problem only once the monetary authorities decide to fight it – through higher interest rates. The market is starting to sniff a change in Central Banks’ tolerance for persistently high inflation and the risk that this will crimp future growth expectations. This emerging concern may be gleaned from the sharp reduction in the U.S. yield spread (graph below) this past week. The confluence of higher inflation, a robust economy and a tightening Fed should mean curve steepening. It did initially. That is because the growth outlook was (and in many ways still is) favourable. But, as Fedspeak has become increasingly inflation-focused, the potential for demand destruction or over-tightening has increased.

U.S. 10yr/2yr Yield Curve | Mpartners Vermogensbeheer

Source: Bloomberg Finance

It must also be noted that this plunge in the yield spread has been accompanied by an increase in credit spreads for both investment grade (first graph below) and non-investment grade debt (second chart below). Again, both charts are not yet at levels that would normally be associated with imminent financial risk – they remain extremely low by historical standards. However, we did warn in a previous communication that should this combination of events (declining yield curve + rising credit spreads) take place, it would demand our most careful monitoring. Any significant continuation of this trend would favour a more conservative risk position.

Bloomberg U.S. Aggregate Baa Average OAS (bps) | Mpartners Vermogensbeheer

Source: Strategas Research Partners

S&P 500 | U.S. High Yield CDX | Mpartners Vermogensbeheer

Source: Bloomberg Finance

The major market threat noted, it is also useful to gauge if the current market volatility has created any opportunities. We highlighted the first chart below just a couple weeks ago which was starting to flash warnings from an increased level of investor optimism and complacency. With the U.S market -4% from its recent highs and the European index -6%, investor optimism has almost been fully wiped out – laying the foundations for the next potential market recovery. The second chart below shows one of the measures of investor sentiment which is monitored in the first table. The AAII survey measures the investor optimism among U.S. retail investors who have been so active this past year. In the space of one week, this group has turned from optimism to outright pessimism.

Sentiment Dashboard | Mpartners Sustainable Value Investing

Bron: Strategas Research Partners

S&P 500 | AAII Survey - % Bearish | Mpartners Sustainable Value Investing

Bron: Strategas Research Partners

With the rapid liquidation of stock positions, the first chart below shows that the percentage of stocks at a 20 day low has now surpassed 50% – a zone that has historically marked an attractive entry point for equities in the context of normal market corrections. The second chart below just shows the favourable market returns based on using this trading strategy over the course of one month to one year. The weight of evidence still supports that this market downturn falls into the more mundane category of corrections, as opposed to the more sinister earnings recession driven declines. Leadership looked different heading into this recent drawdown, than it did in the weeks and months leading up to February / March of 2020. Then the market was signaling a more pronounced growth concern and favouring defensive leadership prior to the actual lockdown actions. On this occasion the market has clearly embraced a more pro-cyclical stance which has been reinforced by the pick-up in global growth in Q4.

S&P 500 % of Stocks at 20-Day Low | Mpartners Sustainable Value Investing

Source: Bloomberg Finance

S&P 500 Forward Returns When 20-Day Lows >50% & in Uptrend

Source: Strategas Research Partners


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David Williams (1970) is responsible for the investment policy of Mpartners. After a brief career in diplomacy with the Ministry of Foreign affairs in Barbados, David joined Insinger de Beaufort asset management in 1997 and became a director in 2002. He was responsible for the investment team and the investment funds (long-only and hedged). His specialism is European equities. David holds a B.A. (Hons) from the University of Kent, an M.Sc. from the London School of Economics and an M.B.A. from Nijenrode university.