Joe Manchin and Omicron Just Gave Bulls a Major Lump of Coal

Stocks fell again this morning as Covid cases surged across the US. After having infected scores of prominent, triple-vaccinated individuals, the Omicron variant has many investors worried that a pandemic “reboot” is underway.

“I have Covid. I came down with Covid on Thursday night,” said Jim Cramer in an interview earlier today, before adding that he’s had three doses of the vaccine.

“I know exactly how I got it,” Cramer continued.

“I was at an event where you had to have PCR [tests]. I got it that night from someone who was tested that day. The problem is it works so fast. You can’t stop it.”

Ominous words from one of the market’s most popular TV analysts.

The rise in new cases certainly feels like a “do-over” pandemic is almost here. But Omicron reportedly provokes far milder symptoms compared to the prior Covid strains, suggesting that net hospitalizations and deaths should remain subdued relative to 2020’s numbers.

That won’t really matter for the market, however, if more economic lockdowns are on their way. The S&P unsurprisingly plunged this morning in response to the spiking case totals. Making matters worse was Sen. Joe Manchin’s “no” vote on Biden’s “Build Back Better” plan. By voting against the new fiscal stimulus bill, Manchin has likely erased $1.75 trillion in expected social spending.

“In light of Manchin’s comments, the odds have clearly declined and we will remove the assumption from our forecast,” wrote Goldman Sachs economist Jan Hatzius.

“With headline CPI reaching as high as 7% in the next few months in our forecast before it begins to fall, the inflation concerns that Sen. Manchin and others have already expressed are likely to persist, making passage more difficult.”

Now the question for traders is whether to buy the current dip. For the last year and a half, it’s mostly been a winning strategy. Stocks would typically rip higher following each big drop.

But now, the macroeconomic landscape has changed dramatically. Persistently high inflation is a major headwind. The Fed plans on raising rates and is currently tapering its asset purchases.

Vital Knowledge’s Adam Crisafulli summed up the dilemma facing dip buyers this morning in a recent note.

“On the one hand, corners of the market are oversold,” Crisafulli said. But “the aggressive ‘buy the dip’ mentality, which proved so profitable for the last 1.5+ years, especially in the high-multiple corners of the market, was underwritten by a tidal wave of stimulus that is now receding.”

Goodbye liquidity. Hello, uncertainty.

That’s not to say buying today’s dip won’t work out, though. The S&P is trading near key support at the December lows. If the index can remain above support, a rally to the record highs could easily follow.

But with Christmas fast approaching, the odds of a Santa Rally have declined considerably. Bulls may lose hope if one doesn’t arrive in time.

And that might just be enough to push the major indexes below the lows of December as we head into January, where the seasonal tendency has historically favored bulls. Given the current investing climate, however, the “January Effect” might not arrive, either, and at a time when the bull market may desperately need a strong rally to stay alive.


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