Lockdowns, new virus variant and stocks - December 05, 2021

Lockdowns, new virus variant and stocks
November saw a surge in new COVID-19 cases in Europe and a growing fear of new lockdowns. Austria was the first western country that introduced a new lockdown. Furthermore, Austria has announced mandatory vaccination against COVID-19. The new restrictions came on November 19. That day, the Austrian stock exchange index (ATX) experienced its worst trading day in 2021 at that time, closing more than 3% lower. News about a novel variant of the coronavirus was yet to come.

That stocks slump was a local incident. Then a new coronavirus variant appeared. The Omicron variant of SARS-CoV-2 was first reported to the World Health Organization (WHO) from South Africa on November 24, 2021. On November 26, 2021, it was identified by the WHO as a variant of concern. This led to a black Friday for the stock market too. November 26 has become the worst trading day since beginning of 2021 for many global stock market indices: the German DAX (-4.15%), the French CAC 40 (-4.75%), the European STOXX 600 (-3.67%), the British FTSE 100 (-3.64%). The S&P 500 (-2.27%) and the Nikkei 225 (-2.53%) have been hit as well, however, it hasn’t been the worst day of 2021 for them. Interestingly, the Chinese SSE Index hasn’t been affected that hard at all. As investors fled the stock market, the 10-year US Treasury Note recorded its largest yield decline since the beginning of the year (meaning an increase in its price).

Were those sell-offs on the stock markets (both Austrian and global one) well-thought strategic moves after careful examination of the situation, or were they yet other knee-jerk reactions? We believe the latter was the case. For Austria, this is already a fourth lockdown caused by the COVID-19 pandemic. And the fact is that stocks recovered from the previous three. Was there any reason to believe that the 4th lockdown would be fatal for the stock market? Moreover, the compulsory vaccination announced on that day may bring the pandemic closer to its end and accelerate overall economic recovery. Let’s look at the slump in stock prices caused by Omicron. We don’t know very much about this variant. We don’t know whether it is more dangerous than the others. We don’t know whether the existing vaccines are effective against it. But we do know that the governments have tools to stabilize the situation in the economies.

Is now the perfect time to buy stocks? Some analysts say yes. Some analysts say the market was overvalued and that lower prices are a better reflection of the reality. We don’t know whether the prices are at the bottom point now and whether the time for buying is really perfect. In fact, no one knows. Uncertainty related to the Omicron variant may cause market volatility. Further bad news may cause new slumps. But you shouldn’t wait for a perfect time to invest because it may never come. In 1951, when Warren Buffett graduated, he was advised to postpone investments until Dow Jones dropped below 200 points. (Which seemed to be predictable as Dow Jones had traded below 200 at some time during every full year since its launch in 1896). He had about $10,000, and if he had taken the advice, he would probably still have about $10,000, since Dow Jones has not been under 200 since then.

However, there is one thing that, in our view, is indisputable: it is a bad time to sell stocks now. As Warren Buffett wrote in his 1997 Letter To the Shareholders of Berkshire Hathaway: “So smile when you read a headline that says "Investors lose as market falls." Edit it in your mind to "Disinvestors lose as market falls -- but investors gain." Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other.”

The bottom line

A novel variant of the coronavirus adds uncertainty to the market. However, the fact is that governments have sufficient instruments at their disposal to stabilize the economies that have proven to be successful in the situations like this. We also know that the stock markets have always weathered difficult situations in the long run. Therefore, panic driven selling stocks is clearly a bad idea. On the contrary, now may be a good time to start investing. You shouldn’t wait for a perfect moment, our recommendation is to starting investing as early as possible.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.