This is how Kim Hyun-seok’s Wall Street Now Omicron Spirit-winning Wall Street Party ends

On the 29th (local time), the New York Stock Exchange seemed to reverse the film taken on the 25th. Major indexes rebounded sharply as low-price buys flooded in. The Nasdaq rose 1.88%, almost making up for its 2.23% decline on Friday on the Omicron. The Dow rose 0.68% and the S&P 500 gained 1.32%. The S&P 500 has returned to its 4650 level, which has been hovering over the past month.

However, not all stocks made up for Friday’s losses. Large tech stocks such as Apple, Microsoft, IBM, Salesforce, Nvidia, Qualcomm, and AMD led the rebound. Microsoft also rose 2.11% on news that CEO Satya Nadella had sold 840,000 shares last week, about half of it, to get $285 billion. On the other hand, Corona beneficiaries such as Zoom and Peloton returned some of their gains on Friday.

Energy and financial stocks recovered significantly, if not all. However, airline and cruise stocks did little to rebound. The fear of omicrons is alive. This is the reason why the Dow and S&P 500 rose relatively lower than on the Nasdaq on that day.

Wall Street brooded over the horrors of the Omicron last weekend. Relevant data are still lacking. However, despite such uncertainty, Wall Street recommended a buy. There is a vaccine, and a cure is coming soon, and this is not March 2020, the early days of Corona.

Goldman Sachs says even assuming the worst-case scenario (the omicron mutation is slightly more contagious than the delta, makes the vaccine less effective, and triggers another outbreak early next year) won’t change the long-term economic outlook much, Goldman Sachs said. said. He added that he will not change economic and market forecasts regarding Omicron until data is available.

Citi said there is uncertainty, but the overall stock market remains strong and investors should consider buying low. At the time when global stock indices reached all-time highs and monetary policy began to tighten, the Omicron news came out and led to massive sell-offs, but there is no specific reason to sell yet.

Credit Suisse says there is still much unknown, but the basic assumption is that the vaccine is more contagious and that the vaccine will remain effective to some extent, even if the vaccine’s protective effect is diminished. He pointed out that the fear did not last long, with alpha, beta and delta mutations occurring over the past 18 months, each generating only short-term sell-offs. He also predicted that the sell-off would reverse once more detailed data on this variation were available.

Credit Suisse reports that buying stocks yields higher returns, especially when the volatility index (VIX), also known as the fear index, is high. Stocks typically see a ‘strong reversal’ after a spike in volatility, such as having surged over 50% last Friday. The VIX, which soared to 28 last Friday, fell to 22 today.

“It’s still too early to get definitive data, but early reports suggest that Omicron has mild or less severe symptoms and is more contagious,” said Bill Ackman, a prominent Wall Street investor on Twitter. This will be positive, not negative, for the market.”

Atlanta Federal Bank Governor Rafael Bostic said in an interview with Fox TV last weekend that the economic recovery of the mutant virus has slowed, but the slowdown has gradually weakened. pointed out.

Pfizer CEO Albert Bulla, referring to the oral antiviral drug Paxrovid on CNBC, said, “The good news about our treatment is that it was designed with the majority of mutations coming from the spike protein.” said. It is said that an upcoming treatment will also work for Omicron. “I don’t think it’s going to result in a vaccine that doesn’t protect the human body,” he said. The result may be that the immune capacity of the vaccine is lowered,” he predicted.

Barry Schub, head of the Vaccine Advisory Board in South Africa, where the case was first discovered, said, “All cases of Omicron infection were mild or mild to moderate. It’s still in its early stages, but there’s nothing that can be concluded (high-risk).” Also, Dr. Angelek Kuche of South Africa, who first reported the case of Omicron infection, did not experience the loss of taste or smell that was seen with the delta mutation infection, and did not see a sharp decrease in blood oxygen saturation when compared to other mutations. Said to be light.

With these positive outlooks and analyzes, the New York stock market started with a gain of around 1%, and it increased as time went on. The Nasdaq peaked 2.2% around 1pm after President Joe Biden said in a speech that “Omicron is a cause for concern, but not enough to cause panic.” . “We have the best vaccines, the best drugs, and the best scientists in the world,” Biden said.

Omicron is rapidly spreading across countries. Following England and Germany, cases were also found in Spain and Sweden, and in Portugal, it was revealed that players of professional soccer teams were infected. The World Health Organization (WHO) has announced that “Omicron is more likely to spread. If Corona spreads again on a large scale, the consequences could be serious.” “It’s a very different mutation with a large number of mutations, possibly related to immune evasion potential and higher contagiousness,” he said.

Deutsche Bank warned, “The vaccination rate in South Africa is 24%, which is low compared to other developed countries, but the median age of the population is young at 28. It is much lower than that of 44 in Western Europe.” In other words, South Africa’s vaccination rate is low, so it can be highly contagious, but because of its large young population, symptoms can be mild. In other developed countries, it means that the symptoms may be severe.

Wall Street initially expected the Fed to accelerate its tapering at the Federal Open Market Committee (FOMC), which will be held on December 14-15. But now, those expectations are gone. This is due to the increased uncertainty with the omicron. Ian Shepardson, chief economist at Pantheon Economics, said: “Unless a clearer and more positive picture emerges, the Fed will delay its decision to increase the pace of its tapering in December.”

This expectation was also reflected in the bond market today. Long-term interest rates have risen, but short-term interest rates have not recovered. As of 5:00 p.m., the 10-year US Treasury yield rose 1.4bp to 1.499% a year, but the 2-year bond fell again by 3.4bp to 0.496%. This is because expectations for a rate hike by the Fed are slowly receding.

In particular, interest rates fell further after Fed Chairman Jerome Powell’s written response to a Senate hearing held tomorrow around 5 p.m. was released. “We believe the micron mutation and the recent surge in infections could pose a threat to the U.S. economy,” Powell said. “Worries about the new strain could reduce the willingness of people to work, slowing labor market progress and deepening supply chain disruptions,” Powell said. can,” he said.

There are three FOMC scenarios that Wall Street expects for December. The basic scenario is that Omicron doesn’t make any major changes, and the Fed maintains its current tapering rate. In the best-case scenario where the omicron mutation is contained or not as bad as the delta mutation, the Fed is expected to cut its bond purchases more quickly starting in January next year and consider raising rates in the spring or early summer. In the worst-case scenario where Omicron almost incapacitates current vaccines, requiring most to be revaccinated, the Fed will have to stop tapering.

The problem is inflation. What if Omicron turned out to be a bad scenario and inflation continues to soar? There is already a lot of controversy on Wall Street. Neil Shearing, an economist at Capital Economics, said: “The spread of the new Omicron infection can exacerbate the job shortage and increase inflationary pressures, compared to the previous period when prices were at a balance between inflation and disinflation when the spread of the coronavirus grew. This will further complicate the already complex monetary policy task.” Oxford Economics also said the risk of wage inflation would increase. Expect it to continue higher until another recession hits. However, demand inflation could be lower or higher. Many of these Wall Street observers are skeptical that inflation could worsen as Omicron will add supply chain disruption and job shortages.

But Harvard University professor Jason Furman tweeted, “The delta mutation lowered inflation. After the advent of the Omicron, oil prices plummeted (which is positive for CPI), and the five-year inflation breakeven rate fell 11 basis points,” he tweeted. . He argued that prices would have been much higher without delta mutations than they are today, suggesting that while delta mutations caused a decrease in supply (rising inflation), it also affected a decrease in demand (deflation) and demand transfer (ambiguity).

In the case of Mizuho, ​​there is also an observation that inflation will decrease when the omicron spreads, but prices will rise when economic activity becomes active again next year.

There is no clear answer right now. This is because we do not know what effect Omicron will have, and it is an unprecedented situation.

Goldman Sachs has presented four scenarios for the proliferation of Omicron. However, in two bad scenarios, assuming the omicron spreads, the effect on inflation is ‘ambiguous’. However, in the positive scenario where Omicron does not have a significant impact, we expect a slight negative impact on demand and a slight lowering of inflation.

Today, BCA Research published a report on how historically, stock bull markets usually end. Analysts analyzed that the main reasons were the Fed’s monetary policy shift and the rate hike. And the Fed is doing it because, after all, inflation is high.

“Markets still see inflation as a temporary phenomenon that will disappear once the supply bottleneck is resolved,” said BCA Research. . If this is the case, I would expect the stock bull market to continue slowly, albeit at a slower pace.

The problem is that there are instances when inflation rises and persists higher than expected and the Fed feels it is lagging behind. If that happens, the Fed will raise interest rates faster than market expectations, which puts risky assets at risk of falling, as well as triggering a recession.

“It’s unclear when the inflection point at which we can determine whether inflation will continue or be temporary,” BCA Research said in a statement. However, he pointed out that we should remain vigilant and change our strategy if prices rise faster than expected now.

New York = Correspondent Hyunseok Kim realist@hankyung.com