Stocks plummeted this morning as Covid fears squashed sentiment during today’s shortened holiday trading session. With many of the major Wall Street players sitting on the sidelines due to the Thanksgiving break, much of the market’s normal liquidity has dried up. That kind of thing typically leaves the indexes more prone to big moves.
Today, a move of that nature saw the S&P plunge below 4,610 for the first time in 18 trading sessions after investors learned about the Covid “Nu” variant, which had been spotted in South Africa before additional cases were identified in Belgium and Botswana. Even worse, researchers claim that the Nu variant is heavily mutated, making it more vaccine resistant than Delta and potentially more infectious as well.
It was enough to spook analysts all over the world.
“When I read that there’s one [case] in Belgium and one in Botswana, we’re going to wake up next week and find one in this country. And I’m not going to recommend anyone buy anything today until we’re sure that isn’t going to happen, and I can’t be sure that it won’t,” said “Mad Money” host Jim Cramer this morning.
Neil Shearing, Capital Economics’ Group Chief Economist, gave perhaps the most accurate take on the true danger of Nu for equity bulls:
“It goes without saying that it’s still too early to say exactly how big a threat the [Nu] strain poses to the global economy,” Shearing said in a note.
“The lesson from the past couple of years is that it’s the restrictions that are imposed in response to the virus – rather than the virus itself – that causes the bulk of the economic damage. So, the key question is how governments will respond in the event that the [Nu] strain spreads.”
It’s likely that Nu has already spread to plenty of other countries – something that will be reflected in Covid statistics next month.
As Shearing observed, though, it won’t matter how much Nu spreads if the US doesn’t impose new lockdown conditions. Several countries in Europe have made the decision to do so even before Nu was discovered. More will follow in their footsteps.
But in the US, a series of 2020-like lockdowns are unlikely to take effect. Demand has softened significantly in recent weeks despite strong retail sales data gathered in October. According to the November FOMC minutes, Committee members are now highly concerned about stagflation – a period in which economic demand stagnates while inflation continues to rise.
If economic activity dips in response to lockdowns, inflation should theoretically fall, too. That might not happen, however, if the US government starts to hand out stimulus checks again while states reactivate Covid restrictions. Simply put, new US lockdowns would be economic suicide and a major political road bump for Democrats ahead of the 2022 midterm elections.
So, despite today’s rough morning session, bulls should not assume that a larger correction is coming just yet. The US remains mostly open for business. No true economic calamity has hit US shores.
Better yet, dip-buyers probably have another opportunity to grab some easy “discount” gains. That’s not to say the market is in good health, though. Nor that its long-term prospects are all that encouraging.
But these days, optimism springs eternal so long as the Fed doesn’t raise rates and the economy doesn’t shut down.
No matter how many new Covid infections or variants “pop up” in the meantime.