“In the next two weeks, from both Pfizer-BioNTech and Moderna, we’ll know how effective the current vaccines are against this new variant,” said Evan David Seigerman, an analyst who covers biopharmaceutical stocks for BMO Capital Markets.
The threat of a new variant always lurked as perhaps the key source of risk investors faced, even as they largely shrugged off the slowdown caused by the Delta variant over the summer. Analysts regularly noted that there was still a possibility that a new permutation could emerge with the potential to derail the market’s rise.
But in recent weeks, investors had grown increasingly confident about the potential for an almost complete economic reopening in the coming year. Shares of so-called stay-at-home stocks such as Peloton and Zoom Video, which generated enormous gains during the pandemic, started to slide fast. Companies set to benefit from a robust return to in-person activity next year — such as concert promoters, hotels and airlines — were on a tear. The stock market notched a series of record highs. In the bond market, investors were boosting bets that the Federal Reserve would start raising interest rates next year, as the economy roared and inflation remained hot.
“We definitely were at an inflection point for market expectations until Friday,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York. “And that’s why we saw such a dramatic re-pricing.”
Unnerving news about the Omicron variant began to emerge from South Africa on Thursday, as Wall Street was closed for the Thanksgiving holiday. On Friday, when the World Health Organization labeled Omicron a “variant of concern,” stocks fell 2.3 percent — the S&P 500’s worst single-day performance since late February.
Shares of stay-at-home stocks and vaccine makers soared as investors moved money to parts of the market that did the best during the darkest days of the pandemic. In the bond market, investors began to reverse their previous bets that the Fed could start raising interest rates early next year, suggesting they thought Omicron could cause a sudden economic slowdown.
Some analysts suggest the scale of the market shock on Friday might have been exaggerated by the relatively light trading activity, as many investors and traders were on a four-day weekend for Thanksgiving.