Key US stock market indexes went up on Tuesday again, putting the downward corrective move on hold. The markets do not seem to be particularly concerned by the Omicron strain, which is rapidly spreading throughout the world. In the US, Omicron accounted for 73% of new COVID-19 cases, with the number reaching 90% in some states. The new strain was even detected in the White House - US president Biden could have been in contact with an infected person. Although Omicron is less severe than previous strains, it is still causing hospitalizations and deaths, inevitably putting pressure on business and economic activity in the US and elsewhere. The falling GDP and retail sales could push down soaring inflation as well, but this is no comfort. New restrictions are likely to lead to a new economic contraction, as indicated by most outlooks for the fourth quarter of 2021. The difficult situation could continue in the first quarter of 2022 as well - the start of the Omicron wave has begun concurrently with the fourth Delta wave, which is particularly dangerous.
Recent reports that vaccines do not shield against Omicron are highly troubling - the new strain is even infecting people who got booster shots. The vaccines do protect against severe illness, but the outlook for the coming months remains unfavorable.
The reaction of the stock market would depend on how severe the new wave of the pandemic is, as well as on the actions by the US government and the Federal Reserve. The Fed could even put QE tapering on hold and resume monetary stimulus. This would lead to a stock index rally - monetary policy tightening is a bearish factor for indexes. The chances of a new dovish policy shift in the upcoming months are rising.
