Omicron Creating Surge In Cases, But Not Severity= Hysteria But Little Bite

This tweet speaks to Omicron at the moment
Omicron is surging across the world and in NYC/NJ area, in particular. This tweet by Scott Wapner @ScottWapnerCNBC really speaks to the situation. There Omicron wave is hitting the US hard. It is leading to a lot of positive infections. But as we highlight below:

• what seems different is the healthcare severity is far lower
• so the risks of infection are high, but the risk of severe risk indeed seems lower

Cornell shuts down campus
In what is expected to be one of many organizations following suit, Cornell earlier this week shut down its campus on 12/14.

• over 903 cases reported in early December
• high percentage were Omicron cases in fully vaccinated individuals
• fortunately, none of the students is experiencing severe illness

While many might view this as a drastic step, Cornell was done with classes, but this week would have been finals week. So there is an impact for students.

Below is the reported cases on the campus, and you can see the rapid ascent in reported cases. Of these, the majority are students.

…Omicron infects 70X faster than other COVID strains
A new study from Hong Kong shows that the Omicron variant infects humans 70 times faster than prior strains.

• but the infection in lungs was “significantly lower”
• which could be an indicator Omicron has less disease severity
• another study from Cambridge believes the Omicron variant might be more transmissible because it may have evolved from a common cold virus

…MA Wastewater shows that cases in Greater Boston might be peaking
While there is mostly bad news regarding the surge in cases in the Northeast, perhaps this chart could be viewed with some encouragement. The samples of wastewater in MA (MA Water Resources Authority) show that the 7D average of cases in the Southern part of the Boston (dark red line) are rolling over.

• the cases in the Northern Boston are still rising
• but this downturn is encouraging, nonetheless

…Omicron concerns leading to a surge in vaccinations
In what can be viewed as an appropriate public response, the number of Americans getting vaccinated is accelerating. As shown below, the number of daily vaccinations is running at about 1.7 million per day:

• the number of vaccinations is holding at 1.7 million per day
• this pace is the strongest since the earliest days of the vaccine program (April 2021)
• and far improved compared to what was seen in Summer 2021

…Policymakers will worry about Omicron, but the healthcare consequences in South Africa still seem more muted
South Africa is seeing a huge surge in cases stemming from Omicron and the 9 provinces are shown below:

• cases are surging in all 9 provinces
• oxygenated patients is broadly declining, except for a minor rise in Gauteng and Free State, but minor
• ventilated is still falling
• ICU is falling except for Gauteng and North West, but still minor
• deaths are mostly falling, except for North West, but data there is choppy

…A similar story is seen in the UK, where cases are up but hospitalized is flat
A similar story is seen in the UK, where cases are up in 9 of the regions, in all 9 regions, specifically. But the number of UK hospitalized is actually trending lower. So this is contrast.

STRATEGY: Financial markets fearful of Omicron, but should take comfort knowing this also scares the Fed
Equity markets have been a bit of roller coaster in the past few days. After surging post FOMC decision, equities struggled yesterday. Opening higher but weakening throughout the day yesterday. A few things, in our view, are contributing to the selling in stocks:

• Omicron wave is driving concerns of more near term business impacts
• Fed Chair Powell also stated that Delta variant drove a slowdown in business, and is concerned Omicron could do the same

And Mark Newton, Head of Technical Strategy for FSInsight notes this keeps the near-term “consolidation in stocks” in play (click here for the report). Naturally, one might wonder why we are not becoming more incrementally bearish, in the face of Omicron risk.

The reason we are not becoming incrementally more bearish, despite Omicron risks, is several:

• Omicron will have an “expiration date”
• Granted, this will coincide with flu season, but South Africa will give us early surveillance

• Unlike the Delta wave, this Omicron hysteria is driving a major surge in vaccination activity
• And this Omicron surge is also going to impact Fed thinking around lift-off and tapering

Thus, Omicron is also pulling Fed and markets incrementally back into dovish territory. Look at inflation breakevens:

• inflation 5-yr breakevens for USA are rolling over
• after surging in 2H2021
• back to levels seen in early 2021

• Europe breakevens are collapsing

Thus, despite the constant commentary from pundits regarding massive inflation waves coming, the inflation breakevens markets are seeing reduced inflation risk. This, in our view, is a positive incremental development.

• it means there is less “push” from financial markets for a Fed to accelerate its timeline
• hence, incrementally positive

SECTORS: Leadership still Cyclicals/Early-cycle aka Epicenter
Relative sector performance is shown below and as we can see, 5 sectors are showing positive relative trend:

• Energy
• Basic Materials
• Technology
• Transports
• Discretionary

• sort of Financials/Banks

These are all cyclical groups. And also have general positive exposure to reflationary trends. Inflation, incidentally, in isolation is not a bad word. The real risk to markets is:

• too much inflation hurting consumer confidence
• or unanchored inflation expectations, fear of uncontained inflation

This is not necessarily what markets seem to be pricing. If markets were worried about either of the above, Defensive stocks or Growth stocks would be leading. Instead, we are seeing Cyclicals lead.

Into YE, our recommended strategies are:

• Energy
• Homebuilders (Golden 6 months) XHB
• Small-caps IWM-0.14%
• Epicenter XLI-0.33%  XLF0.43%  XLB0.06%  RCD
• Crypto equities BITO3.94%  GBTC4.29%  BITW5.27%

Into 2022…

• Industrials

Figure: Way forward ➜ What changes after COVID-19
Per FSInsight

Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019