Markets: Up on an Escalator and Down on an Elevator

American markets today, Friday, viewed several hours before opening at  9:30 a.m. EST, appear poised for a negative start as the S&P 500, DOW and NASDAQ are all in the red. They are struggling with the news of the spread of the Omicron variant and the implications of President Joe Biden’s announcement yesterday of new restrictions. At the same time, a healthy jobs report might push one or more of them into the green during the trading day.

Canadian markets look set to open lower with the TSX 60 firmly in the red.

European markets are already open at time of writing and major indicators there are in the red, although the FTSE 100 is struggling and might make it into positive territory during the trading day.

Amongst currencies the Canadian dollar and British pound sterling are down against the American greenback. That status may not change in the short-term, according to Lawrence Kaplin, Senior Dealer at London-based payments specialist Equals Money. “Sterling continues to be rangebound as events elsewhere dominate markets. UK/EU Brexit trade talks are set to continue today but with both sides remaining steadfast in their respective positions the prospects for a post Brexit trade deal hang in the balance,” he says.

Hopes of a full deal before Christmas are slim, he says, adding that French Prime Minister  Emmanuel Macron’s description of British Prime Minister Boris Johnson as ‘a clown” and ‘a knucklehead” – while they may have been more for French consumption – will not help negotiations, meaning that  “...the mood music going into the talks is hardly conducive to a deal being reached.”

Meanwhile the Euro is flat against the American greenback, reflecting virus-related pressures. ”The Euro came under renewed pressure yesterday afternoon following news that Germany, in line with many other European countries, is to tighten its Covid restrictions,” Kaplin explains.

Amongst commodities oil prices are climbing as analysts consider two contradictory factors: the news that OPEC+ countries announced that they would proceed with plans to increase output by 400,000 barrels per day and at the same time the possibility of an Omicron virus-related drop-in demand.

This follows several days of heart-wrenching market tumult. On Wednesday, the DOW swung almost 1000 points after news of the first case of the Covid Omicron in the United States. It had been up 520 points but closed down 461 points or more than 1.3%. That hobbled the recovery that was underway from the previous plunge triggered by worries over Omicron, interest rates and the possibility that the Federal Reserve Bank would begin tapering sooner than originally planned. Fed Chair Jerome Powell surprised markets with the announcement that the Fed may taper its asset program months sooner than originally planned, and therefore raise interest rates sooner than the markets had anticipated.

Still, the market managed some recovery yesterday as the three major indices finished in the green. Overall, the Omicron variant has frightened markets, analysts and investors for over a week. It hit travel stocks severely but many of them bounced back. Expedia Group Inc. closed at $161.28, up $5.62 or 3.61% on the day. American Airlines group Inc. finished the day at $17.42, up $1.14 or 7% on the day. Amongst hotels, Hilton Worldwide Holdings Inc., Hyatt Hotels Corp. and Marriott International Inc. all posted strong gains after taking heavy hits a week ago when news of the Omicron first broke.

These events have proven conclusively that stock market volatility will continue at least for the short-and-medium-terms, and possibly longer. “We spent 29 days in a row in the S&P 500 without a 1% change, up or down, but boom --  Omicron hits and five days we’ve had this blast of volatility,” explained Ryan Derrick at LPL Financial in a Reuters report

Exacerbating the volatility, the plunges are often quick, deep and brutal while the recoveries are much slower and with interruptions as happened this week. That pattern is essentially standard procedure, according to Gavin Graham, Chief Strategy Officer at SmartBe Investments and Contributing Editor at The Income Investor.

“The old joke about stock markets is that ‘They go up on an escalator but down in an elevator,” he explains. That reflects the fact that market gains tend to be gradual over a long period of time as growth in the economy and company earnings is priced into stock valuations.

Graham says that with the exception of bubble periods such as 1929 and the technology bubble in late 1999, stock prices very rarely go straight up, and this only happens when prices have been rising continuously for a long time and investors have become very complacent that the good times will keep rolling.

By comparison, market crashes will often occur as very sharp declines, such as occurred in 1929, 1999-2000 and during the Great Financial Crisis in 2008-09, or during the Covid-19 pandemic bear market in February and March last year. Investors suddenly realize the assumptions they have been using are incorrect and investments need to be repriced very rapidly.

The COVID bear market provides a textbook example. The S&P 500 and other global stock markets fell by one-third in one month with the spread of the pandemic, Graham recalls. It meant that the way people lived and behaved suddenly underwent enormous changes, including people fleeing city centres, the acceleration of the rise of e-commerce and working from home and the almost complete halt to global travel. Similarly, in 2008 investors realized sub-prime mortgages were not investment grade and in 2000 they realized that internet stocks could not all get enormous market share.

As happens regularly, I’m reminded of the words of the Ryan Gosling character in Blade Runner 2049: ‘Buckle Up’.

Disclosure: I do not own any shares in any company mentioned in this column.

Related: The Other List to Draw Up

Al Emid is a financial journalist, broadcaster and author with two books underway.

The Emid Report on Volatility 2022 is scheduled for release in January 2022 and his book on overseas investing is scheduled for release in January 2023.