Quick takes on capital markets

07 Jan 2022

COVID-19 latest wave: High numbers, low impact

Aside from some volatility, markets are shrugging off the Omicron variant. Not only is the virus posing less of a risk to economic activity, but supply chain normalization has not been derailed by the latest wave. Both the public and markets are becoming more resilient.

Market performance and COVID-19 case growth
Index level, 7-day moving case average, February 2020 – present

Global asset classes in 2021
Source: Bloomberg, Principal Global Investors. Data as of January 6, 2022.

On January 3, 2022, almost 1.5 million people in the United States tested positive for COVID-19, tripling the 500,000 recorded just four days earlier. And yet, equity markets have largely shrugged off this astonishing spread, with the S&P 500 even hitting new record highs in recent weeks.

The Omicron variant hasn't dented the positive market narrative for three reasons:

  1. Despite a surge in case growth, there are considerably fewer instances of severe infections leading to hospitalizations and deaths.
  2. As a result of Omicron's lower virulence, mobility restrictions have been less stringent, so services activity is unlikely to slow as meaningfully as in earlier waves. While the U.S. ISM services index fell from 67 to 62 in December, it continues to signal impressive strength.
  3. Progress toward vaccinations should ensure the latest wave doesn't significantly intensify supply chain bottlenecks. In turn, the most acute upward price pressures are still expected to ease through 2022.

Markets are increasingly reassured that the economy will hold up well. Earnings growth will be solid this year, and with inflation pressures still set to ease in 2022, the U.S. Federal Reserve is unlikely to aggressively tighten policy beyond what's already priced in. While the next few months may be challenging and markets volatile, with each COVID wave both the public and risk markets are becoming more resilient.

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