Markets were doubly rattled in late November, first by the emergence of the apparently more transmissible Omicron variant of COVID-19, and second by a suggestion from Fed Chair Jay Powell that the taper may need to proceed more rapidly than had been assumed, perhaps opening the door to an increase in the US policy rate as early as March. We know very little that is concrete, at this stage, about the ability of Omicron to evade immunity, or to cause serious disease. But for now it serves as a reminder that the virus retains the potential to mutate, and to surprise. If that proves sufficient to take some of the steam out of the S&P 500, which prior to the above two pieces of news was 40% above its pre-COVID peak, and 110% above its early-pandemic lows, that may be no bad thing. Our judgement, based on experience of the Alpha variant late last year, is that the impact of Omicron on global economic activity will be limited. If renewed lockdowns were put in place, it is almost inevitable that they would be combined with additional fiscal support, potentially creating further supply bottlenecks, and putting further upward pressure on inflation. This brings us to investors’ second source of concern.

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