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Omicron Effect

Rutgers–Camden researcher explains Omicron variant’s impact on the stock market.

With the spread of the COVID-19 Omicron variant, investors across the country have seen substantial hits to their portfolios. Richard Michelfelder, a clinical associate professor in the Rutgers–Camden School of Business whose research focuses on regulation, utility stock prices and stock market risk, spoke to why coronavirus fears affect stock prices so universally and what investors should do to weather the storm.

Why has fear of the Omicron variant affected stock prices so precipitously across the board?

Richard Michelfelder: The pandemic has affected most businesses indirectly, if not directly. These companies still face labor shortages, rising wage costs, supplies and services shortages, and rising costs associated with supply-chain disruptions. In addition, all companies face over six percent general inflation in the United States.

Many professional investment managers and individual investors think about equities as an asset class and will buy and sell equities in bulk. They will also trade exchange-traded funds (ETFs) and index funds—for example, the S&P 500—that hold hundreds of equities. There is also the contagion effect, no pun intended. When one or a few bellwether stocks drop, other stocks are sold as a result.

Do large investors monitor certain market indicators that tell them when to buy and sell?

RM: They watch many financial and macroeconomic indicators on a regular basis and use trading programs that trade when specific levels are reached. The problem here is that most indicators and trading algorithms are not much help when trying to assess investors’ expectations of some new pandemic variant, which is a recent shock. By definition, shocks defy expectations.

In some instances, stocks have also dropped heavily when Federal Reserve Chair Jerome Powell has spoken publicly. What types of messages do you think investors are hoping to hear?

RM: Anything conveying that inflation is temporary and that interest rates won’t rise in the long term due to continued inflation.

What are some other suggestions for increasing investors’ confidence in the market?

Do not make monetary policy that includes major swings in course or movements by the Federal Reserve to affect interest rates, which is a cause of uncertainty itself.

What is your advice for retail investors weathering the storm?

I generally do not provide carte-blanche advice, as there is an almost infinite number of investor types and circumstances. However, I will state that equity investing should be based on a long-run outlook. The shorter the run someone seeks in a strategy, the closer they get to gambling and not investing.

Is there anything else that you wish to add?

People have a tendency to overreact to good news and bad news, as we initially react with emotions and not rationally. Think about the last time you received very good or bad news that you had no idea was coming; how did you react?

In the same way, adverse shocks cause stocks to fall too much and good news causes them to rise too much. It may be helpful to think about this during the next upward spike or major drop in the markets.

In time, we will get back to being rational and stock prices may better reflect where they should be: fair market value.