Stocks were anything but in the black on “Black Friday” last week as markets around the world took a dive in reaction to news out of South Africa about the emergence of a new Covid variant. On the day, a mercifully truncated day of trading, the S&P fell 106.8 points, or -2.3% the Dow gave up 905 points, or -2.5%, and the Nasdaq was off 353 points, or -2.2%. It was the worst Black Friday selloff since 1931.

That coronaviruses mutate is well understood, but little is known yet on the transmissibility or the virulence of this new strain, now known as Omicron after the 15th letter of the Greek alphabet. Nonetheless, the U.S., the U.K., Japan, and several other countries acted to ban admission to travelers from southern Africa while the World Health Organization (WHO) moved to characterize it as a “variant of concern.” 

It is likely to be a few weeks before scientists get a clear understanding of this new permutation of the virus. But on Friday, markets weren’t waiting as investors, still carrying vivid memories of last year’s Covid-driven shutdown and market collapse, reflexively sold off most risk assets. Then, on Monday, there was a reconsideration and stocks moved sharply higher, gaining back about half of what they lost, only to give back a lot of those gains in the following session. And as of the late morning on Wednesday, the market had reconsidered yet again and rose to within 1.1% of its all-time high. It was a reminder again of how quickly events – and volatility – can take hold of the market, and of investor psychology. 

There is no real way to anticipate this. Investors understand these large-scale things to be true in the abstract – one day there will be a global pandemic, global warming will lead to more powerful weather events – but knowing this provides little in the way of useful investment guidance because the timing remains a mystery. 

For investors, the 15th letter of the Greek alphabet is currently trumping all other concerns. It will take a week or two to see whether all this was warranted. But what does remain true is that a well-balanced portfolio, one that incorporates alternative exposures designed to help mitigate sudden downturns while still seeking to participating in moves to the upside, remains a prudent long-term strategy in what continues to be a very uncertain world.

 

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