- Global stocks were under pressure today, driven by fears that a new COVID-19 variant identified in South Africa could disrupt the economic recovery. During the shortened trading day because of the Thanksgiving holiday, volatility spiked the most since May. Travel-related and cyclical stocks declined the most, and oil was nearly 12% lower, its worst daily performance in 20 months. Consistent with the risk-off equity-market reaction, government bonds were higher and yields sharply lower, with the 10-year falling to 1.50%.
- The discovery of the new COVID-19 variant in southern Africa is triggering fears that the new strain can potentially evade the vaccines, complicate the global reopening process, and derail the positive economic momentum. At this point there are more questions than answers on the medical front, and it is too early to gauge how big a threat the new variant is to the global economy. Given the uncertainty and because equities have had a very strong year so far, the initial reaction from investors was to cut risk and gravitate towards safe-haven assets like bonds. The low-liquidity conditions because of the holiday and early-market close likely contributed to the elevated volatility.
- Our initial take is that while the new variant can lead to more travel restrictions and a step back in the global reopening, it is unlikely to derail the bull market. Unlike last year, there are more medical solutions available, including promising anti-viral pills; governments are less willing to impose severe restrictions on activity; and consumers and businesses have adapted and learned to live with the virus. Also, if economic activity takes a step back because of the new variant, the Fed is likely to postpone plans to raise interest rates and keep monetary policy looser for longer, a positive for markets. We recommend investors avoid the temptation to abandon long-term strategies based on near-term uncertainties. High volatility and caution could persist until there is more clarity, but we think the fundamental conditions remain broadly supportive, including solid consumer finances, strong corporate balance sheets, and low interest rates.
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