Throughout history, when people sensed immediate danger they would strike back in self defense. As the settlers of the United States moved westward, it was called shooting first and asking questions later. The same principle of acting defensively in a swift manner takes hold in the financial markets. During events like wars, assassinations, terrorist events, pandemics, earthquakes, and political conflicts, capital sees danger. When once in a generation events take place, they are called outliers and nicknamed ‘black swans.’
“This idea that in order to make a decision you need to focus on the consequences (which you can know) rather than the probability (which you can’t know) is the central idea of uncertainty.” Nicholas
The most well known person who made the term famous is ex-trader Nicholas Taleb. Taleb is a best selling author who writes books about the way statistics are manipulated and often misunderstood. One related and critical idea is uncertainty.
For those familiar with the financial markets, unpredictability and uncertainty are hated. Predictability and stability are always desired. In the digital age, it is now seamless to get your phone out, click a button, and immediately sell anything which is seen as risky or uncertain. Why do I bring this up?
Late on Thanksgiving day, reports from South Africa came out that there is a new COVID strain known as Omicron. It recently emerged in southern African countries and the WHO warned of it’s severity. European countries banned travelers from eight countries in Africa and President Joseph Biden announced similar restrictions on Friday.
In the scientific community, testing has already begun to identify the strain and efficacy of existing vaccines and therapeutics. For financial markets, usually the day after Thanksgiving is one where light volumes occur. The focus is primarily on Black Friday and shopping numbers. Not last Friday, however, as the market took a beating.
With the algorithms in full force, anything travel or consumer related was sold. Energy and banks weren’t spared either as oil finished down 13% in one session. As has been the case for a long time, when the market needs a whipping boy, energy is the easy answer. Financial’s aren’t as hated, but they certainly aren’t loved, either. They get sold hard whenever the end of the world is near.
The important question is: Are we facing a situation where all the solutions created for previous variants rendered impotent? Only the scientists really know the answer, but I remain optimistic that the world’s medical researchers will solve this variant in time. Any other approach would be, uh, let’s call it, negative. Could this variant be much harder to control and bring back travel restrictions and more? Of course, and therein lies the uncertainty and market reaction.
Elsewhere in the financial world, Jerome Powell was reappointed as Fed Chair with Lael Brainard taking Vice Chairmanship. Progressives pushed hard for Brainard to take the lead but Mr. Biden decided to stick with Jerome. Powell faces a new variable with the new strain on the existing COVID issue.
In combination with the recent emergence of inflation and it’s question of sustainability, Jerome has two offsetting factors to tell the world why his best course of action is to do nothing. In the medical profession, the long held dictum is to do no harm. Those who believe Powell is already behind the curve won’t have much argument if the new variant is like the Delta in it’s negative effect on the economy.
On the earnings front, Zoom Video Communications (NASDAQ:ZM) reported early in the week and sold off even though it exceeded estimates. Gap (NYSE:GPS) and Nordstrom (NYSE:JWN) took shellakings later in the week when they blamed supply chain issues for their performance.
On the positive side, both Dick’s Sporting Goods (NYSE:DKS) and John Deere (NYSE:DE) posted nice numbers. HP (NYSE:HPQ) and Dell Technologies (NYSE:DELL) did the same, as did Best Buy (NYSE:BBY).
Looking ahead, more normal participation is to be expected this coming week as more information about the new variant is revealed. Tax loss selling is also a factor during this time of year. It is a time to prepare for situations which you have long found attractive, if only, well, use your imagination.