Omicron, The Fed, and 2022


Equity markets were broadly down last week with the S&P 500 down 1.2%, now placing it about -3.5% off its closing November 5th high of 4697.5. The real weakness in the markets over that period has come in the areas of “growth at any price” software and reopening stocks, such as Zoom and Peloton, and energy and material names.

Risk Factors

We’re looking at several risk factors that could be driving the downward action:

  • First, the Omicron variant. Much of the still-unknowns around this variant and its potential effects are causing investors to take a “ready, fire, aim” approach.
  • Second, Fed Tapering. Jerome Powell and other Fed members are indicating that they may have to taper QE and begin raising rates sooner than anticipated.
  • Third, tax-loss selling. Volatility in the markets near the end of the year provides an opportunity for institutional and retail investors to recognize some tax losses before the end of the year.

Institutions Raising Cash

There is also a significant amount of de-leveraging by hedge funds going on. Data from Morgan Stanley Prime Brokerage shows that US equity long/short hedge fund gross leverage fell to the lowest levels in 12 months. This means that hedge funds have dramatically de-risked on the Omicron and Fed related risks.

Institutional investors have raised cash in each of the last 5 weeks, and according to ICI and Fundstrat there is currently $3.2 trillion cash on the sidelines, the highest in all of 2021. It’s important to remember that cash on the sidelines = firepower, and that having a large amount of cash already on the sidelines is more likely to be a sign of a market bottom than a market top.

Omicron and the Fed

There are a number of different scenarios related to both the Omicron variant and Fed action. The variant could be milder or worse than expected. The Fed could keep a more “hawkish” taper stance or do a “dovish” walk back. Interestingly, in regards to the stock market, many of the potential scenarios can produce outcomes that are more likely to be positive for equity markets than not.  For example, if the omicron variant is milder than expected and the Fed maintains a faster pace, this is likely a net positive for stocks. If the omicron variant is harsher than expected, and the Fed does a “dovish walkback,” that is also likely to be net positive for stocks. Most current data – which is still early and could change – points to Omicron being milder than expected, which would make a “Omicron mild + ‘hawkish’ Fed” outcome likely. And unless tapering weakens the economy (which is not likely), the markets can still rally even if the Fed does maintain a faster taper, particularly given the large institutional cash position currently waiting on the sidelines.

A Key Indicator: The MOVE Index

Scenario analysis is helpful for theorizing different outcomes and framing events, but even more important is what the markets themselves are actually saying. If the markets do not bear out the theory, it is the theory that is proven wrong! For us, we always look to be guided by actual market action and price action as we make our investment decisions. This brings us to the MOVE Index.

The MOVE Index is the equivalent of the equity VIX index, but for U.S. Long-Term Treasuries. Volatility in the MOVE index tends to lead when compared to volatility in equity markets. Moves in the MOVE index can actually proceed short-term periods of fast, sometimes gut-wrenching volatility in equity markets, but such moves also do tend to be relatively brief. Our view is that bond volatility does look to be peaking, which could be an indicator that equity volatility is also close to a peak.

The price action in the MOVE index and movements in the forward volatility markets the first half of this week should go a considerable way towards revealing whether we are close to beginning another rally.

2022 Outlook Now Available!

Our 2022 First Half outlook is now available on YouTube, and in spite of the recent short-term volatility, we maintain this view. The video can be viewed on the Oak Harvest YouTube channel, or just scroll down this page to watch here.

In addition, we will be releasing a video this week to cover our view of recent market volatility and what we think it means for 2022 this week. Please keep an eye on the Oak Harvest YouTube Channel.

Oak Harvest YouTube Channel

Stock Talk Podcast (Weekly Market News and Opinion from Oak Harvest):

The Investor Mindset Podcast (Introduction to Critical Concepts for Investors):


Oak Harvest Stock Talk: 2022 First Half Outlook


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