Everyone Loves A Rally

“We like this,” one CIO said, on the first day of the last week of the first year of the rest of our lives.

US equities notched another all-time closing high on Monday, as Wall Street looked to finish year one of the post-COVID era with a flourish.

It was the 69th record close of 2021. For what it’s worth, there aren’t enough days left to break the record (figure below).

At this point, any “Santa Claus rally” would just amount to the proverbial cherry on the sundae. 2021 will go down as a barnburner.

Taken at face value, the news flow around COVID wasn’t particularly encouraging. At least one health official in Australia has resigned himself to the notion that “pretty well everybody… at some point will get Omicron.” Although it’s unlikely heads of state will openly adopt a similarly fatalistic take, it does seem as though Omicron will be remembered as a turning point of sorts. China’s quixotic efforts aside, there’s no “stopping the spread” this time.

France decided to make working from home mandatory for three days per week in an effort to contain the variant and Anthony Fauci suggested making vaccines compulsory for domestic air travel. But, again, there’s no stopping this variant. Thankfully, there’s enough evidence now to say, with some degree of confidence, that it causes less severe disease.

The bottom line is that you either get vaccinated, then get boosted, or else accept that i) you’re now almost guaranteed to be exposed to some strain of COVID and ii) without a vaccine, infection is far more likely to land you in the hospital. Or in a coffin. It’s just that simple. Frankly, I’m not sure additional public service announcements or presidential exhortations are necessary. Omicron looks poised to finish this. For better or for worse depends in no small part on your vaccination status. And everyone, including the unvaccinated, knows it. On Monday, the CDC shortened quarantine times for infected Americans to five days from 10.

The good news is, Omicron may indeed be the beginning of the end for COVID as we’ve all known it since it first emerged in Wuhan two years ago. It does seem feasible that a less deadly strain combined with vaccines and, now, multiple approved oral therapeutics, will downgrade COVID to something like a particularly dangerous version of the flu. Still a top public health concern, to be sure. But no longer something existential for the species. The figure (below) underscores the point.

This comes with the usual caveat that even if Omicron causes far less severe disease, the sheer number of cases and the vulnerability associated with tens of millions of unvaccinated Americans, could still overwhelm the health care system. That shouldn’t (indeed, it can’t and won’t) go undocumented. Additionally, don’t let it be lost on you that anyone who dies needlessly from COVID (i.e., if their only risk factor was that they weren’t vaccinated) is a national tragedy.

With those (decidedly morbid) caveats, and at the risk of coming across as callous (because in the context of life and death, who cares about stocks?), Omicron may indeed turn out to be good news for equities. Just as several analysts suggested earlier this month.

In a Monday note, JPMorgan’s Dubravko Lakos-Bujas reiterated that the bank “does not expect Omicron to impact the growth outlook in any significant way, but rather is likely to accelerate the end of the pandemic by crowding out potentially more lethal variants.”

That wasn’t the only upbeat takeaway from the bank’s latest equity strategy piece. “In our view, conditions for a large sell-off are not in place right now given already low investor positioning, record buybacks, limited systematic amplifiers and positive January seasonals,” Lakos-Bujas went on to say, echoing colleague Marko Kolanovic.

The bank also said Monday that they “do not think the Fed is behind the curve.” If you ask JPMorgan’s equities team, there’s “a compelling case for inflation pressures normalizing in coming months and quarters.” Lakos-Bujas did acknowledge that “some ‘technical’ adjustment in central bank policy is warranted.” Specifically, he mentioned the desirability of bringing the shadow rate back up to zero.

Commenting during a set of appropriately perfunctory remarks for the always perfunctory first trading session coming out of Christmas, the CIO mentioned here at the outset told Bloomberg simply, “We love to see the Santa Claus rally continue.”