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New COVID Variant Fears Rattle Markets

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·3 min read
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  • VXX
  • WFH
  • JNK
  • XLU
  • XRT
  • XLRE
  • JETS

[Editor’s Note: This article was updated to include the Greek alphabet letter that WHO gave the latest COVID variant.]

A new variant of COVID-19 discovered in South Africa was deemed a variant of concern by the World Health Organization earlier this week. The strain B.1.1.529 has been named "Omicron" by WHO. It will likely be weeks until scientists fully understand if it spreads faster, causes more severe illness or evades vaccine protection.

But global markets panicked on reports that the strain has already been detected in Belgium, Hong Kong and Israel, with the S&P 500 sliding 2.17% as of 12:07 a.m. Eastern Time, while the Dow Jones Industrial Average fell 2.91%.

Equities Slammed, Volatility Rules

The same sectors that went into free fall last March got hit again on Friday. The Energy Select Sector SPDR Fund (XLE) fell 6% as near-month oil futures in New York fell $9.28 to $69.11 per barrel, and the U.S. Global Jets ETF (JETS) dropped 9.83% as countries announced curbs to air travel in South Africa.

The Invesco Dynamic Leisure and Entertainment ETF (PEJ) dropped 5.05%, while the SPDR S&P Retail ETF (XRT) fell 3.47% on Black Friday, the marquee shopping event for brick-and-mortar retailers.

Even sectors that did relatively well during the initial onset of the pandemic fell, with the Utilities Select Sector SPDR Fund (XLU) and the Real Estate Select Sector SPDR Fund (XLRE) falling 1.53% and 2.4%, respectively. Even COVID-defensive funds like the Direxion Work From Home ETF (WFH) and the Vanguard Consumer Staples Index Fund ETF (VDC) took a cut, falling 1.25% and 1.35%, respectively.

The SPDR Gold Shares ETF (GLD) barely advanced, seeing a 0.38% gain, while bitcoin slid 8%, or $4,705 per token.

The shortened trading session on Friday only added to the volatility and generated a 16.84% gain for the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX).

Sam Stovall, chief investment strategist at CFRA Research, said it’ll take days or weeks to assess just how large a threat the new variant will be. That will likely ward off the enthusiasm from earlier this year to buy stocks on the cheap.

“Doesn’t look like it’ll be a ‘buy the dip’ day,” he said.

Bonds A Haven

Investors piled into bonds, sending Treasury yields tumbling. The yield on a five-year bill fell 17.8 basis points, and the 10-year yield fell 15.8 basis points, while the yield on a 30-year bond fell 13.1 points.

The iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND) both gained 0.7%, as did the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD).

However, high-yield assets took the opposite direction, with the SPDR Bloomberg High Yield Bond ETF (JNK) falling 0.85%.

Don’t Panic?

Stovall said investors should avoid overreacting, as equities have been quick to rebound from pandemic shocks.

“Remember that it took fewer than five months to recover fully from the 34% bear market in 2020, and we recovered what we lost in the recent pullback in a little more than two weeks,” he said.

Contact Dan Mika at dan.mika@etf.com, and follow him on Twitter

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