What omicron means for your investments
By Kyle Tetting
News of the omicron variant quickly lowered stock markets in a holiday shortened trading session the day after Thanksgiving. While concerning — both for public health and potential economic impact — the specifics of the new COVID-19 variant aren’t understood enough yet to draw conclusions about what omicron means for stocks.
Nevertheless, the S&P 500 sold off more than 2% Nov. 26, and implied volatility – investors’ expectations for how bumpy the next 30 days will be – spiked 50%. It’s as if investors were just waiting for bad news.
Year-end is an interesting time for investors: Many investment firms begin to prognosticate about the future; investment managers look to position portfolios through the end of the year; and there’s little stock-specific news to move markets.
Like everything investment related, advice varies, but staying the course through the end of the year has tended to reward stock investors — despite all the noise.
The omicron variant and the accompanying spike in implied volatility highlight a larger concern for stocks. By nearly every measure, stocks are expensive. The CAPE ratio, measuring stock price over a 10-year look at earnings, sits at levels not seen since the dot-com bubble. The forward P/E ratio for the S&P 500 – suggesting what investors are willing to pay for the next 12 months of earnings – ended November at 22% above its 25-year average.
None of this directly implies correction or an impending bear market. Higher-than-typical valuations are supported by low interest rates and higher-than-typical profit margins. However, high prices do lend themselves to selling pressures and elevated volatility.
Most notably, investors are on heightened alert for the one particular news item that signals the start of the next correction. Despite lack of data on the risks of omicron, investors used news of the new variant as an opportunity to de-risk. With the S&P trading near all-time highs on the day before Thanksgiving, the Black Friday sell-off carried extra weight as investors looked to lock in some strong year-to-date gains.
More articles and videos from Kyle Tetting on Money Talk
High prices also force investors to confront difficult choices about future expectations. Especially following three strong years for stocks, it’s reasonable to assume that the next three won’t be as robust. Add in expectations for heightened volatility, and our desire for stock exposure may weaken.
After such a strong run for stocks and amid elevated valuations and heightened market volatility, our typical cautious optimism leans more toward caution in the near term. In and of itself, this is not a reason to change course. Rather, it is a strong reminder of the need to plan for the harsher weather which lies ahead.
The remaining risk we face as investors is to place too much emphasis on near-term concerns. By planning for the likelihood of rough patches and accommodating even unforeseen risk, we allow ourselves to better focus on the long-term optimism that comes with investing in stocks.
We have many reasons to remain optimistic beyond current headlines. For instance, the pandemic brought about a significant shift in productivity, the benefits of which are only beginning to be felt in corporate profits. Also, an influx of new publicly traded companies has created new opportunities for investors, which is especially important given the small number of companies generating the majority of investors’ returns the past few years.
Despite some risk posed by current high valuations, investors who are prepared to weather any possible storm should fare well. Planning now for the range of potential outcomes in the near term will allow us to better capture the clear long-term opportunities. While the exact answer is necessarily different for every investor, an appropriate balance plays a crucial part in ensuring that we can properly navigate whatever comes next.
Kyle Tetting is director of research and an investment advisor at Landaas & Company.
Investors: Prepare for stock corrections, a Money Talk Video with Paige Radke
A note on coronavirus volatility, by Kyle Tetting
When Should I …rebalance my portfolio? by Art Rothschild
5 ways rebalancing calms anxious investors, a Money Talk Video with Marc Amateis
The case for active funds amid volatility, a Money Talk Video with Kyle Tetting
Beginners Guide to Asset Allocation, Diversification and Rebalancing, from the U.S. Securities and Exchange Commission
Rebalancing Your Portfolio, from the Financial Industry Regulatory Authority
(initially posted December 3, 2021)
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