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Markets are ‘switching gears’ in assessing the Omicron threat: Strategist

SEI Chief Investment Officer Jim Smigiel joins Yahoo Finance Live to discuss the market outlook as stock movements remains volatile.

Video Transcript

AKIKO FUJITA: Well, we have seen those headlines around omicron continue to rattle the markets, but we are seeing stocks up today in a big way, the Dow up more than 500 points right now after that sell-off we saw yesterday. Let's bring in Jim Smigiel. He is SEI chief investment officer. Jim, it feels like we've been experiencing a bit of whiplash over the last several sessions here. We had that big sell-off on Friday and a light trading day. Yesterday, we saw it down on news that we have, in fact, gotten the first US case, another case reported in Minnesota today. How are you looking at all this in the context of the markets in what investors should be looking at?

JIM SMIGIEL: Thanks for having me. The markets, I think, are clearly-- today is a bit of a rebound, but they have been pricing in, really, a worst case scenario. So obviously, there was a ton of uncertainty. We just heard from Dr. Eaton on that around this most recent variant. But the market has really placed its best on a bad outcome, which I think you're seeing today some signs of positive outlooks coming into play. So the cases that we've seen so far in the States, as you mentioned, have been mild.

The head of the South African Medical Association op ed yesterday, talking about their cases that they've seen have been mild. So I think the market is now switching gears a little bit and perhaps lessening the intensity on the potential for negative outcomes. You know, the big issue still remains more about the world government's reaction to the variant and what that means from a lockdown perspective. And that's what the market is still kind of struggling with at this stage.

ZACK GUZMAN: Yeah, there's a lot of unknowns out there right now. But I mean, I guess when you think about the reaction over the last few days of selling, whether or not you think that's an overreaction, given kind of what we know about omicron and kind of how it might impact some sectors, it was interesting to see kind of both sides of the coin sold off, right?

We were expecting maybe some of those names, those COVID favorites to come back when we're thinking about stay at home or even learn from home, some of those things that saw some spikes back last year. But not the case-- really kind of across the board, just selling writ large. So I mean, how do you interpret that in terms of where investors are in their appetite for risk here, particularly given the fact that we're kind of at year end and maybe tax things might be top of mind?

JIM SMIGIEL: I think that's a key point. There's definitely some profit taking happening here. The biggest move that we saw was a very low liquidity day, the day after Thanksgiving. That has to be taken into account. But our outlook does remain positive. We are more positive than the market. We still think the market is being a bit too negative on this. We don't think we're going to see returns to lockdowns in the United States. While that may be the case and appears to already be the case in certain areas around the world, and they will certainly have supply chain effects, we don't think we're going to see that coming.

We expect the data to continue to come out, show the mild reaction to this variant. And we don't expect anything severe. So we, we're still positioning in that kind of reopening stance. What does that mean? That means more of value orientation from the equity space, a positive outlook on commodities, and a continued up-- or well, not continued, but a renewed upward pressure, we should say, on interest rates. And again, that also speaks to the more hawkish tone coming out of the Fed and the Treasury this week.

AKIKO FUJITA: Yeah, I was going to follow up on that, Jim. I mean, is that really what the bigger risk is right now? You know, you mentioned that the market's pricing in the worst case scenario for this variant. It feels like everything we've learned so far is that it may not be as severe as delta. But of course, the science still needs to play out. On the other hand, we did hear from Jay Powell this week saying, yes, in fact, the Fed would consider accelerating its tapering timeline come December meeting.

JIM SMIGIEL: So, you know, it was a really important one-two punch for the market, so getting hit with the variant on the Friday and then the removal of the notion of transitory. And, you know, the acceleration of the taper really puts a potential rate hike in play much sooner than expected. So I mean, you could really have March on the table for a rate hike here, which I think, you know, the market is discounting maybe a little bit more than it should be. So, you know, I think you're exactly right. You know, this variant, could that push that back out again? Of course, it could if it takes a turn for the worse. But we have a hawkish Fed.

And comparing the Fed to some of the other major central banks around the world, particularly when we look at Europe, we have divergence again. So central banks have all been on the same page for quite some time. The Fed is clearly putting down a much more hawkish tone than we've seen. You know, the dollar hasn't necessarily suggested that. The dollar's been a bit weaker through this, which has also been very interesting and I think suggestive of a lot of this move may be coming from a little bit more year end window dressing than maybe we're giving attention to.

ZACK GUZMAN: Well, it has been interesting, too, just kind of looking at the sectors that have performed, I guess, best during the chop. You mentioned maybe some of the supply issues still being felt moving forward. We heard that from Jay Powell as well.

When you look at maybe the best way for investors to be defensive, let's say that things don't pan out like what you're talking about and say some of these fears are, I guess, truer than some might fear, and you look at maybe where you could go-- healthcare is off by the lowest margin, here only off by about 2% over the last week. When you look at the sectors that you might lean into here, which ones, I guess, seem to offer the best situation there? I know you're still long some of those names there on the travel side and the cyclical side here. But where would you maybe advise people to start looking?

JIM SMIGIEL: You know, broadly, I think we're still in the value camp. So while there are certainly more higher beta areas of the value camp, which are going to be energy related, other areas such as financials I think are also a safe bet for investors. So that is much, much more a lot more quality names than there.

You're going to get a little bit of crossover from value to quality as well. You know, that's an area of the market that has done well, but has also shown a bit more resilience in this recent chop than some of the pure reopening names things, like airlines and gaming and things along those lines. So financials is another big area for us. It's one that we like, and it's one that we recommend kind of going forward, which is a little bit more all weather, if you will, from the different potential paths that this variant could take us.

ZACK GUZMAN: Jim Smigiel, SEI chief investment officer, I appreciate you coming on here to chat with us today. Thanks again for the insight. Be well.