Covid in our broader lives – not just the health impacts – is not going to go away anytime soon. The vaccines have not taken us back to a 2019 future; life is going to continue to be “messy”.
More specifically, the new variant – and even more, how governments react, and even more immediately how investors think they are likely to react – introduces a further “complication” into investment decision-making we could have well done without.
Although we had enough on our plate as it was, before the variant jumped into our lives almost literally “yesterday”, the issues and uncertainties framing the investment outlook into 2022 were relatively conventional.
Yes, they remained complex and unpredictable, but we could pretty much define them and they all turned on what central banks would do with interest rates, and their money-printing, and when.
Associated with this were judgments you had to make – or rely on from “experts” – about world economic growth, in the US and China most especially, energy prices, trade tensions, and so on.
Domestically, how strong would the recovery from the lockdowns in NSW and Victoria prove through Christmas? Would business turn its intentions to go on a major investment spending surge through 2022 into actual delivery?
Critical to all this was how quickly would we see a return to strong immigration, mostly to supply labour and key skills but also to feed into demand.
So, what would happen to inflation and wages, especially in the first half of next year? And would the Reserve Bank come back from the Christmas break in nearly February and stick to its current intention not to hike rates until 2024?
Now all those questions still remain. But you now have to re-add Covid to the mix. Does it prove to be a minor hiccup, or are we headed back to border closures and even, perish the thought, lockdowns?
Obviously, it’s too soon to say; just as nobody back in February 2020 would have predicted what would eventuate over the next two years.
What we can say, is that what happened on Wall St overnight Friday, will have obliterated any chance of the Fed moving to tighten any time soon. Not that there was really much prospect of that anyway.
If the Dow can drop 1000 points in the absence of any suggestion of a Fed move, imagine what the drop would be if Wall St actually thought the Fed was planning a shift.
There is no way that newly re-appointed Fed head Jerome Powell and his newly-elevated ultra-dove deputy Lael Brainard would run the risk of that happening.
The “problem” for investors with this Covid variant, as with everything Covid, is that it is most unlikely to be resolved cleanly and quickly, one way or the other – either that it’s tipping us back into Covid Chaos 2.0 or that it proves manageable without derailing the opening up.
Oil prices fell sharply on the basis that it will at least hinder if not stop the global recovery; that demand for oil will therefore fall.
But initially that’s just traders talking their books; the actual demand for oil – set against supply obviously – will reassert itself in setting the oil price.
If demand does fall, that will sustain a lower oil price. If demand does not fall, if the global recovery picks up pace, oil prices will surge back.
The most honest thing to be said is that we are just going to have to see how the next couple of months, at least, play out.
It could prove just a ‘scare’ so we go back to the 2022 as it was developing. Or we find that “all bets are off” as we head into Covid Chaos 2.0, hopefully a much milder version of the Covid Chaos 1.0 of the past two years.
One thing it does do is revitalise two-way markets pretty much across the board.
The way things were developing, markets were becoming all one-way. That activity would rise strongly through 2022. That inflation and wages would accelerate. That central banks would raise interest rates and end their money-printing. And so on.
Now, everything’s much more uncertain; at the very least, for the next few weeks.
Friday’s drop on Wall St, our own market drop, could be a mini-buying opportunity. They could also be bear-market trap.
Over the next few weeks, indeed quite likely months, we are going to see that question posed many times, until we get a much better grasp of what this variant – and indeed further variants that might or probably surface – actually means.
And how governments, and central banks, respond.
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