The Tell: Omicron variant may delay ‘breakout’ performance of these stock-market trades, RBC says
The omicron variant of the coronavirus may hold back “breakout” performances for certain areas of the U.S. stock market, but heightened concern over the spread of COVID-19 infections hasn’t derailed the outlook for the S&P 500 index in 2022, according to RBC Capital Markets.
“From a U.S. equity market perspective, the main risk we see today is that the intermediate-term bout of leadership in value, cyclicals, and small cap we’ve been waiting for may be on hold,” analysts led by Lori Calvasina, RBC’s head of U.S. equity strategy, said in a note Monday. “These parts of the U.S. equity market have been deeply undervalued and tend to outperform when U.S. GDP is running hot,” and ahead of first rate increases by the Federal Reserve, they said.
RBC is for now keeping its S&P 500 price target of 5,050 for 2022, according to the note. The analysts said that the S&P 500 index, which tracks the performance of U.S. large-cap stocks, has “a clear secular growth bias” that aids its resilience during times of investor nervousness.
The emergence of the omicron variant of the coronavirus in South Africa rattled the U.S. stock market Friday, with President Joe Biden announcing travel restrictions from the country and seven other nations beginning Monday. “While volumes were light in the holiday-shortened trading session, it should be noted that Friday’s stock market reaction reflected true fear,” as opposed to nervousness, the RBC analysts said.
Within equities, the relative performance of growth versus value, secular and cyclical, and large-cap and small-cap, “have all been moving in sync with trends in domestic COVID-19 cases for most of 2021,” according to the RBC report. “When the rate of change in domestic COVID-19 is worsening,” the analysts said that “growth, secular, and large cap have tended to outperform.”
U.S. stocks were on the rebound Monday, with the S&P 500
up about 1.6% in afternoon trading at around 4,667, while the Russell 1000 Growth index was outperforming the Russell 1000 Value index, FactSet data showed, at last check.
The Russell 1000 Growth index
was up sharply, with gains of around 2.2% in afternoon trading Monday, according to FactSet. The Russell 1000 Value index
was lagging with gains of about 0.9%.
“There’s much we don’t know about the omicron variant,” the RBC analysts wrote. “Our biotech team currently believe that the new variant is a reason to proceed with caution but not to panic.”
While U.S. gross domestic product, or GDP, has been expected to expand at an above average rate in 2022, “an improving COVID-19 backdrop has also been a necessary condition” for value, cyclicals and small-cap stocks to outperform, according to RBC.
The U.S. economy has continued to rebound against the backdrop of elevated inflation in the pandemic, with some investors anticipating the Fed could begin raising its benchmark interest rate next year.
The RBC analysts also pointed to risks that the omicron variant poses to supply chains, creating the potential for more stock-market volatility in the near term.
“The improvement in the global COVID-19 backdrop in recent months had foreshadowed the peak in freight rates that occurred this fall, which helped to put a bottom in the S&P 500 and cyclical sectors,” they wrote. “Now, worsening global COVID trends may be foreshadowing new problems on this front.”
Investors have been expecting to see supply chain improvement in mid-2022, and should they start doubting that timeline, “it’s likely to spark further volatility in stocks in the short term,” the RBC analysts said.
The Cboe Volatility Index, or VIX, was trading around 22 on Monday afternoon, down from Friday when it spiked to more than 28, according to FactSet data. Still, the VIX
remains up from trading levels of around 19 seen earlier last week before the new omicron variant startled investors.