The Omicron variant ‘could lead to more volatile days ahead,’ strategist says

Anastasia Amoroso, iCapital Network Chief Investment Strategist, spoke with Yahoo Finance Live about the outlook for markets amid the new COVID Omicron variant and why biotech companies may benefit from the ongoing pandemic.

Video transcript

JULIE HYMAN: Right now, though, we're going to have a discussion with a market participant about what we should be doing in this now tricky environment. Once again, Anastasia Amoroso is iCapital Network Chief Investment Strategist. Anastasia, it's always good to see you. Just, first of all, give us your first blush reaction to what we saw Friday, what we're seeing today, and how investors and how you're thinking about it.

ANASTASIA AMOROSO: Good to see you, Julie. I think the biggest question right now for investors is was that an overreaction that we saw on Friday. And I could say that I think it was an overreaction from the technical perspective, meaning it was a holiday week, it was the tail-end of it, it was thin trading volumes, it was low market debt. So I think whatever catalyst we had on Friday got exacerbated to the downside because of some of those technical pressures.

But what the jury's still out on is whether there were fundamental reasons for the markets to sell off. And the simple answer to that is we just don't know that. We're going to find out in the next few weeks, most likely, but we don't know if this virus is going to be-- if this variant is going to be more severe, if it's going to be more resistant to vaccines. So we don't know that. And as you guys just pointed out that, as we find out more and more, this could lead to more volatile days ahead.

And I just don't think we've hit the level of the S&P where I'm willing to say this is a screaming buying opportunity right now. We don't see that from the oversold technical levels, and also we have another potentially negative catalyst here, which is the Fed. If Omicron is not an issue but the Fed starts to react to higher inflation, we could have a hawkish Fed pivot. So I think the market, broadly, we need to maybe put a pause on the Santa rally expectations and look for pockets of opportunity, which I do see a few.

BRIAN CHEUNG: Anastasia, I guess-- first of all, tell us what those pockets are. That was a deep tease right there. You got to let us know what those pockets of opportunity are. But then, secondly, does the fact that markets sold off as viciously as they did on Friday, even despite some of the thin trading volume, as you pointed out, speak to the broad acknowledgment that valuations were high and maybe weren't factoring in these risks of other variants, which, by the way, we had known ahead of last week. How do you think those things factored [INAUDIBLE]?

ANASTASIA AMOROSO: Brian, I do think it's a very good-- that's a very good point, that it's not just one thing that led to the Friday meltdown but it was several of them. First of all, earlier in the week, or even the last few weeks, we were worried about rising cases in Austria, Germany, you know, China had its wave. So partially, it was that. Partially, it was because of higher inflation and the potential hawkish Fed.

And there has been more hawk talk from some of the Fed officials. So I think it's all of those things, and then a new variant on top of that. And, you know, you look at the setup in the market-- you got stretched valuations, you got positioning that's not overly stretched but it was pretty bullish. So all it takes is a catalyst or two-- after what's been a stellar quarter to date rally. So I think that's why we got the Friday outcome that we got.

But to go back to some of the opportunities-- again, I'm not willing to say this as a screaming buy for the broader market, but I think there's two things that you can do in the portfolio today. And the first one is that biotech sector. It is becoming very clear that COVID is here to stay and that it may produce new variants. And a lot of these companies that are developing COVID vaccines and COVID treatments may be benefiting from an addressable market that is larger than people have penciled in.

I think we're going to see demand for boosters rise. I think globally there's only 11% of the population that has received a booster. But we know immunity wanes, and now we've got a new variant to worry about, so that's likely going to lead to a greater uptick in some of the boosters. And also, is this only going to be a 2022 story of boosters? That may not be the case if we end up with something like an annual booster shot.

We don't know yet, but we can't rule it out. And the last thing I'll say really quickly about biotech is that, what biotech names are doing right now, they're proving the platform value. They're proving that the mRNA is not just a COVID vaccine, it is a platform that could be used for COVID variants, for flu, for combination vaccines, and much more.

So there is a whole value that's assigned to it. And that's why, despite the uptick that we saw in some of these names, I would still be a buyer of some of those biotech names.

JULIE HYMAN: And Anastasia-- sorry. I was just going to ask the best vehicle to do that, because I know that you're not going to give us sort of specific company stock picks, but we were just showing the XBI, which is the S&P biotech ETF. The IBB is another way to play it. Do you think that that's best to sort of buy a basket here?

ANASTASIA AMOROSO: I do think a basket makes sense, and I would be very careful to differentiate between XBI and IBB. But IBB in particular, if you look through the top holdings, it does have a lot of the vaccine names, it has a lot of the COVID treatment names, the antibody treatment. So it really does have more of a COVID basket-type exposure that you want, so-- and by the way, IBB is up about 2% for the year, the S&P is up 22%.

So I would look to a vehicle like that, which not only do you have the COVID tailwind, but also biotech tends to have a pretty strong seasonality heading into the JP Morgan Healthcare Conference, which takes place every year in early to mid-January. So I do think there's [INAUDIBLE] seasonality to something like an IBB ETF here as well.

- And then, lastly here, you were talking about the Fed. Yes, we did hear some hawk talk. In fact, we heard San Francisco Fed president Mary Daly here on our program last week telling us that she could see the case for a speedier taper. That was ahead of the Omicron variant news later in the week. But are we gleaning too much out of this?

Because the Fed has already said, look, the timing of our taper-- which is what they're immediately working through-- really has no bearing on the timing of eventual interest rate hikes, yet you saw Fed funds futures market and kind of US Treasury markets pricing in, perhaps, a later rate hike after the news on Friday. Do you think a lot of that might be overbaked?

ANASTASIA AMOROSO: Brian, there's a lot to unpack there, because, yes, it seems like we know what the taper is going to look like, but we've saw a lot more inflation talk from the Fed recently, including at the renomination speech of Fed chair Powell. He stressed inflation and the need to be vigilant and protect against runaway inflation. So I do think there's scope that's opened up here to potentially fast track the tapering process.

And some market participants are looking for the taper to finish in March, which should pave the way for a June rate hike, and maybe another couple between now and the end of the year. So I think we need to be watching the inflation talk from the Fed very, very closely and not take for granted what they've said before on the taper that's set in stone. So what does this mean for market participants? I think next year we'll kind of see a repeat of this year, but maybe not as supportive for the equity markets. I think equities will outperform bonds, and bonds will likely continue to struggle because the rate should continue to rise.

JULIE HYMAN: Anastasia, thanks so much. Appreciate it. Anastasia Amoroso is iCapital Network Chief Investment Strategist.