Just before Christmas, the stock market became very volatile. Experts attribute the volatility in part to the unknowns surrounding the Omicron variant of the Covid-19 virus, along with concern about recent inflation numbers and the likely development of Federal Reserve monetary policies.

In the words of Liz Young, the head of investment strategy at SoFi, a personal finance firm, the decline on Monday, Dec. 20 in particular had “everything to do with the idea that we have uncertainty over Covid and we have a Fed that isn’t going to save us this time.” 

The Federal Reserve is not going to pump a lot of new money into the economy with asset purchases in order to stimulate the country’s way out of whatever nervousness Omicron causes. Indeed, as Young added, “they shouldn’t save us.” Some tapering of the money supply is appropriate at this time.  

The S&P 500 index entered December near 4500. It reached 4709 on Dec. 15. That was just when Omicron jitters seem to have set in, around the time one normally sees a so-called “Santa Claus rally.” 

Santa was otherwise occupied, and the market slid to 4668 on Thursday, Dec. 16, then to 4620 on the 17. 

On Monday, Dec. 20, the market saw its third straight drop, leading to the concern expressed by Liz Young and others that the market was, so to speak, testing positive for a virus.  

Tuesday, though, was a snapback day. The chief market strategist at TD Ameritrade, J.J. Kinahan, said that “investors may be getting into a speculative mood.” The bad news about Omicron had already been discounted, on this view, and investors were willing to look beyond it. 

“Additionally, cryptocurrencies which have recently been correlated with ‘risk on’ investments are seeing rallies as well,” added Kinahan.  

Meanwhile, technical analysts were talking hopefully about how the market had hit a “support level.”

So Santa may have shown up after all. News that the FDA has authorized two antiviral pills to fight Covid-19 from Pfizer and Merck may have been in his red sack.

What effect will omicron have upon the stock market in January? To answer that question, it is natural to look back to this summer, when the Delta variant was at its peak.

Looking back at the Delta Variant

Nasdaq and S&P 500 both saw significant drops, 1.7% and 1.9% respectively on a single day, July 19. The 10-year Treasury also took a fall that day. Since T-bond yields are historically of very low volatility: that was worrisome.

July 19, a Monday, was also a bad day on the stock markets in Europe: FTSE 100 (London), for example, fell 2.6%.

The good news about July was that the market soon recovered from its Delta jitters. It was back to the levels of the preceding week by the end of trading that Wednesday. And that foreshadowed a steady rise over the following two months, well into September.

It is plausible to see the pre-Christmas Omicron scare as an analog to the July Delta scare. Is the scare already in the rear view mirror? Is buying rational?

Looking Forward: Fear and Greed

In the words of stock market maestro Warren Buffett, “be fearful when others are greedy, be greedy when others are fearful.” The fear of Omicron may be a good omen for the strategically greedy.

After Mondays fall, before the recovery of the following days, Joe Terranova, senior maaging director at Virtus Investment Partners, asked himself: “Is this the onset of the bear market?” And he answered that question in the negative, “This is a correction that is going to provide an opportunity, and that opportunity presents itself depending upon where you sit on the risk curve.”

That is not to say that there is no genuine cloud within the silver lining. Jan Hatzius, of Goldman Sachs, said recently that the continuation of the pandemic, under the name of ‘Omicron’ or any other, will keep political attention on virus related issues. This will prevent any focus on longer-term reforms which, Hatzius said, are already overdue.

As always above Wall Street, there is plenty of room for clouds … and silver linings.