Stock markets slumped on Tuesday after the head of Moderna said existingvaccines may not be as effective against the appearing in a growing number of countries around the world.
The Dow Jones Industrial Average slipped 652 points, or 1.9%, to close at 34,484 on Tuesday. The index has declined 5.3% from its record peak of more than 36,000, reached earlier this month. Other indices also slumped on Tuesday, with the S&P 500 slipping 1.9% and the tech-heavy Nasdaq declining 1.6%.
Investors were spooked by Moderna CEO Stéphane Bancel’s comments to the Financial Times about the new variant, given its potential to create headwinds for the global economic recovery. Although experts say it’s premature to assume that Omicron could derail economic growth, investors are weighing conflicting reports about the variant.
At the same time, investors were alsofrom Federal Reserve Chair Jerome Powell, who testified on Tuesday at the Senate Committee on Banking, Housing and Urban Affairs. Powell said the Omicron variant as posing “downside risks to employment and economic activity and increased uncertainty for inflation.”
He added, “Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.”
Powell also said he would like to “retire” the description ofa term that he had stuck with as rising prices have lingered throughout 2021. Many economists expect inflation to remain elevated into 2022.
“Powell just added gasoline to the fire by finally admitting that inflation isn’t going away as fast as anyone would like,” Ryan Detrick, chief market strategist for LPL Financial, said in an emailed comment about the selloff.
The comments reflect a “significant change of tone from Powell,” noted Fitch chief economist Brian Coulton.
Bancel told the FT that it’s likely the current group of vaccines to protect against COVID-19 may need modification due to Omicron’s high number of mutations.
The Omicron strain adds more risk to a global economy already contending with considerable uncertainty, according to Wall Street analysts. The variant appears to spread more easily, and countries around the world have put up barriers to travel in hopes of stemming it.
Travel bans, including decisions by Japan and Israel to bar all foreign visitors, threaten to disrupt global business. Global supply chains already gummed up by bottlenecks could be further ensnarled if outbreaks shut down factories, ports and freight yards.
What’s the economic outlook?
Even as some nations are responding with travel bans, economists caution that the impact of Omicron won’t be known for some time.
“It will take several weeks before we obtain more clarity on the strength, transmissibility and vaccine effectiveness of the new variant,” noted Oxford Economics chief U.S. economist Gregory Daco in a Tuesday research note.
Still, he noted, there could be three potential outcomes:
- A marginal scenario, with no impact on the economy.
- A moderate scenario, with mild symptoms from the new strain and a mild economic hit to travel and leisure industries in the first quarter.
- A more severe scenario if the new variant proves more contagious and vaccine-resistant, which could lead to slower economic growth if nations renew restrictions and consumers cut spending.
Meanwhile, Federal Reserve Chair Jerome Powell said Monday that the appearance of the new variantand hiring, while also raising uncertainty about inflation.
The recent increase in Delta variant cases and the emergence of Omicron “pose downside risks to employment and economic activity and increased uncertainty for inflation,” Powell said in prepared remarks to be delivered to the Senate Banking Committee on Tuesday. The new variant could also worsen supply chain disruptions, he said.
Some analysts think the U.S. is likely to avert a serious economic downturn akin to what happened in 2020 because many people have been vaccinated. But they also think a return to pre-pandemic levels of economic activity, especially in tourism, has been dramatically delayed.
“Uncertainty from the new omicron variant may seem to bring about higher economic risks for [Asia] at a time where it is shifting towards further reopening,” Yeap Jun Rong, market strategist at IG in Singapore, said of Omicron’s impact on Asia.