Market Volatility: Schwab’s Quick Take

U.S. and global stocks fell sharply Friday amid spiking fears about a new COVID variant, named Omicron, emanating from South Africa, where it’s spreading quickly. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite indices closed down more than 2%, while the Russell 2000 fell nearly 4%.

U.S. stocks: Major indices dropped sharply

Adding salt to today’s wound was the news about a lower efficacy of Merck’s COVID-19 pill, which reportedly reduces the risk of hospitalization/death among adults with mild/moderate virus by 30%, down from the original expectation of 48%.

Even before today’s selloff, market breadth had been deteriorating (market breadth reflects the number of stocks with rising prices vs. declining prices) and investor sentiment had been very optimistic, which can be a contrarian indicator. Sentiment is key to watch in the near term to see if today’s decline puts a dent in the recent signs of euphoria, especially if market breadth continues to deteriorate.

Low-quality and/or speculative market segments were hit even harder than the major averages. Many speculative trades have had (or remain in) bear-market-level drawdowns from year-to-date highs, as the bias toward higher-quality companies has continued to strengthen.

Global stocks: Policymaker, consumer responses will be key

The economic impact of any new COVID-19 waves will likely depend on both policymaker and consumer responses. We’ve seen different approaches (e.g., the U.K. and U.S. are less likely to add restrictions versus China’s “zero tolerance” policy), as well as consumer behavior (either in reduced spending, hesitancy to return to work, and/or masking and social distancing).

The COVID-19 toolbox has expanded relative to prior waves, including oral pills to treat infections, which could result in a shorter and/or smaller economic impact. However, supply chains are already stressed, and new virus waves could extend disruption length.