We are seeing a post-Thanksgiving hangover with global markets down between 1% and 3% today. A flight to safety is underway with the 10-year U.S. Treasury yield down about 11 basis points to 1.53%. The proximate cause of the selloff is yesterday’s announcement of a new COVID-19 variant in South Africa, which investors fear could weigh on economic growth.
The pandemic and COVID variants remain one of the biggest risks to markets, and are likely to continue to inject volatility over the next year(s). It’s hard to say at this point how lasting or impactful this latest variant will be for markets. Importantly, we have seen other COVID-19 variants spring up before that prove fleeting (for example, the lambda and mu strains were less problematic than initially feared). Consumers and corporations are also in a better position to cope with this uncertainty, having dealt with the pandemic for most of the past two years and having adapted. Moreover, Pfizer indicated that it could develop and produce a tailor-made vaccine against a new variant in about 100 days. Also, if this strand becomes more problematic, we could see central banks quickly ratchet back plans to tighten policy. This is not the base case, but something for investors to keep in mind. Today’s market drop is larger than what we have seen recently—and could be exacerbated given thin trading around the holiday—but not particularly unusual. We just saw a 2% decline at the end of September before the recent rally kicked off. This setback should also be placed in the context of a 9% rise since early October and 25% year-to-date gains for the S&P 500. That said, markets are not oversold either, given stocks were hovering around record highs prior to the news. We see initial support for the S&P 500 around 4500-4550, which approximates the 50-day moving average and the August highs..
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