How Should Investors Navigate The Markets With The Omicron Variant?

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Article was originally posted on The Joyful Investors blog (https://thejoyfulinvestors.com)

The S&P500 tumbled by more than 2% on Black Friday as news of the Omicron variant surfaced. On the same day, the Cboe Volatility Index (VIX), which measures the fear index of the market, topped out at 28.99. This means that there is an increase in the level of fear and uncertainty among the sentiments of the general market participants.

Well, I’m going to skip the details on how scary the Omicron variant can be because I’m sure various news outlets have already done their job to scare the shit out of investors.

So what should investors be doing now?

First, understand that we cannot predict the exact magnitude of impact of the Omicron variant on the stock market. 

The stock market, in the short term, is a voting machine. Emotions and psychology play a very key role in influencing the price fluctuations of the stock market. If things can be kept in control quickly, the fear factor of the investors can then be contained. With the experience from managing the other variants of COVID-19, the governments, pharmaceutical and medical stakeholders may be able to react more promptly to contain this new variant. In any case, it is not our job as an investor to predict whether that would happen because we don’t have a crystal ball!

Next, learn to manage your emotions and avoid being blindly influenced by what you see on the internet. 

There are many news articles, financial and investing articles which use words like “markets are crashing”. Before you get scared off and start selling off your investments thinking that the markets have crashed, this is not a crash yet! The decline since Black Friday was just about 3%, which does not constitute a market crash. A market crash is defined to be a sudden decline in prices by more than 20%. It is important to think of the facts and logic before jumping into conclusions or acting rashly. News articles and content on the internet like to play around with certain words to grab your attention so that you will read or watch their content.

Learn from history. 

Let’s take a look at how the market reacted to COVID-19 since 2020.

Exhibit: S&P500 index as at 30 Nov 2021 and the dates the variants were designated as Variants of Concern (VOCs)

In March 2020, we experienced a surprise crash of over 30% in the stock markets when the coronavirus spread out of China and could not be contained.

Soon after, various variants of COVID surfaced — we had the Alpha, Beta, Gamma and Delta variants. At the same time, pharmaceutical companies like Pfizer and Moderna were actively working on vaccines that could protect us against COVID-19, which the vaccines were eventually distributed to the masses. Here we can see that the market did not react as negatively when the variants were discovered as compared to the crash in March 2020.

What we can learn from history is that the market reacts the most negatively when it is caught by surprise. And that was during March 2020. Subsequently, as we ‘got used’ to living with the coronavirus, the market did not react as violently with the surge of COVID cases or the emergence of new variants.

In the event if the Omicron variant brings about more pernicious impacts than the previous variants, and results in more adverse reactions in the stock markets, we saw in history how a crash can still eventually recover as the situation becomes more contained.

Capitalise on the decline to buy good stocks. 

Would you like to buy your favourite backpack or handbag during the normal retail price or when there is a promotion? Ask yourself, why do you prefer to buy during the promotional period? Because there is no change to the quality of the bag, yet you get to enjoy the benefits of owning it at a lower cost! The same goes to the stock market. If there are no changes to the fundamentals of the quality companies, why should you be fearful of buying them?

This again illustrates the importance of holding some cash at the sidelines for your investment portfolio. 

We never know when the next good opportunity will come. Oftentimes, opportunities are thrown at us when we are least expected. Hence, it would be good to set aside some cash in your investment portfolio or brokerage account that can be put to good use during such times. If you want to know more about why we should hold some cash while being invested and how much you can be looking at, check out our video sharing here (https://youtu.be/77kCAWX4Ql4).

Build your portfolio with a longer term view. 

There is a common misconception that investors have to be reconstructing or changing their stocks portfolio mix to the stocks that are expected to survive or do well during each market event, such as inflation or supply chain bottleneck or now, the Omicron variant.

In fact, our stock watchlist does not change even as the economy and other macroeconomic factors change. Because these are the companies which we have already screened out to be the strongest contestants out of the 6,000 companies listed on the US stock exchanges. Whenever we are presented with opportunities to buy them on a good risk-to-reward setup, we would grab the opportunity regardless of the macroeconomic event at play.

What’s more important is understanding whether there has been a deterioration in the fundamentals of those companies. If there isn’t, our conviction in these quality companies stays the same and we would love to buy the quality companies that lost favour at attractive prices. The odds are working in our favour because of the high probabilities for the stock prices of the quality companies to be bouncing back up in due time.

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