Just when it seemed like the Omicron coronavirus variant might overshadow the traditional Santa Claus Rally, and stocks might be due for a deeper sell-off, equities gained momentum, bouncing for a second day in a row on Wednesday.
The Dow Jones Industrial Average added more than 220 points to Tuesday’s climb, while the S&P 500 and the Nasdaq Composite rallied 0.8% amid thin holiday trading, which is anticipated for the rest of the holiday week.
Major stock ETFs received a boost on Wednesday as well, with the SPDR Dow Jones Industrial Average ETF (DIA), the SPDR S&P 500 ETF Trust (SPY), and the Invesco QQQ Trust (QQQ) all green just after 1:00 PM EST.
The last month of the year is often a more tepid one for stocks, but that has not been the case this year, as the VIX has been spiking above 20, ushering in the most volatile month of 2021, according to Bespoke Investment Group, which examined the S&P 500′s average absolute daily change since 1953.
The VIX, often referred to as the “fear gauge,” is the Cboe Volatility Index. The index, which typically runs contrary to stocks, rocketed above 35 earlier this month and has remained above the 20 threshold, which often signals impending volatility.
While it is unclear if this trend will continue, periods in which the VIX was consistently above 20 have included: the U.S. recession of 1991, the emerging market financial crises in the late 1990s, the U.S. recession of 2001, the U.S. recession of 2008, the European financial crisis of 2012, and, most recently, the U.S. recession of 2020.
For traders who see stocks continuing to head higher, the ProShares Short VIX ETF (SVXY) typically climbs as the VIX falls. According to the fund’s profile: “The investment seeks daily investment results, before fees and expenses, that correspond to one-half the inverse (-0.5x) of the performance of the S&P 500 VIX Short-Term Futures Index for a single day. The index seeks to offer exposure to market volatility through publicly traded futures markets and is designed to measure the implied volatility of the S&P 500 over 30 days in the future.”
Meanwhile, investors looking to use ETFs to trade the VIX as it moves higher over the short- or long-term can look to the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY), along with the CBOE Volatility Index. Potential investors should keep in mind that VIX-related exchange traded products track VIX futures and not the spot price. Notably, VXX and VIXY are both up roughly 6% as of Monday, amid a 5.74% move higher in the underlying index.
Investors have been on a rollercoaster ride amid fears of the quickly disseminating Omicron COVID variant, swiftly climbing inflation, and the end of ultra-easy monetary policy. Some are now disillusioned and considering the possibility of receiving lower returns and potentially more volatility in 2022 after another robust year for the S&P 500, which climbed almost 24%.
“I think you naturally are getting a little bit of this bounce after we’ve had a couple choppy sessions. But also the market is trying to price and digest the new information we’re getting here,” Anna Han, Wells Fargo securities equity strategist, told Yahoo Finance Live on Tuesday. “We had some news on Build Back Better getting delayed, we have more information on Omicron. These are the things you’re seeing combine with low liquidity as we get into year-end, so we’re not surprised to see the volatility.”
Still, analysts are noting investor optimism, especially for those with longer-term perspectives.
“The news flow is negative in the near-term as the Omicron wave causes economic and corporate earnings dislocations, but investors are increasingly bullish looking out beyond the next few weeks,” Adam Crisafulli, founder of Vital Knowledge, writes in a note.
All three of the key stock indexes reversed from support levels on Tuesday to stage a massive rally after several days of weakness due to Omicron worries. The Dow gained 560 points, or 1.6%, while the S&P 500 rallied 1.8%, and the Nasdaq Composite climbed a healthy 2.4%. The S&P 500 broke a three-day losing streak that saw the benchmark crater over 3%, its worst loss during similar time periods since September. Meanwhile, the Nasdaq plummeted roughly 4% in its worst such drop since May.
“I think this is a perfect time to remind everybody that the market is a leading indicator. So the market is going to go down, the market is going to bottom before the bad news peaks,” Liz Young, SoFi head of investment strategy, told Yahoo Finance Live on Tuesday. “We likely haven’t heard all of the bad news yet. We certainly haven’t hit a peak in the Omicron cases.”
“But what we’re seeing in the action [Tuesday] is that, we’ve had three days of a sell-off. And some of that I think was overdone, especially in a lot of these areas that are positioned to do well in a reopening environment,” Young added. “You have to have some money in the market in areas that should do well in that particular way. Airlines are one of those, cyclicals are more of those. When we look at the pattern in the market today, I think this makes sense for what’s ahead for the next 6 to 12 months.”
The relief rally received an additional boost from the Food and Drug Administration granting emergency use authorization for Pfizer’s COVID pill on Wednesday. The move makes this the first antiviral drug against the virus for at-home use. Pfizer shares gained about 2%, while the iShares U.S. Pharmaceuticals ETF (IHE) is up over 1% on Wednesday.
IHE is one of the options available for investors looking to access the pharmaceutical industry, a sub-sector of healthcare that has the potential to perform well during periods of consolidation and that may be appealing as a source of capital appreciation over the long run.
President Biden pushed for Americans to continue to get vaccinated and boosted, but also reiterated that the U.S. will not reinstate the severe lockdowns that were imposed at the start of the pandemic.
With the Delta variant, “the economy was able to sustain better than most expected,” said Keith Buchanan, portfolio manager at Globalt Investments. “A lot of people will say that the economy held up because there was more monetary stimulus. Coming into Omicron, that’s not necessarily the case as much as it was in Delta and this is another test of a different flavor. It’s testing if the economy and the market can hold up given the much less accommodative fiscal and monetary policy.”
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