By David Randall

NEW YORK (Reuters) – Investors are closely watching the latest data on the rapidly spreading Omicron variant https://www.reuters.com/business/healthcare-pharmaceuticals/how-worried-should-we-be-about-omicron-variant-2021-12-14 for signs of how much the virus could impact the U.S. economy and earnings as the market heads into what has historically been a strong time of year for equities.

Since the Omicron variant’s identification on Nov. 24, the Omicron variant has only impacted the overall market by 0.1%. Stocks of tourism and travel stocks are more affected than the wider market. The Invesco Dynamic Leisure Entertainment ETF fell 1.1% during the same period.

“The market is extremely reactionary now and every little bit of news has a huge impact,” said George Young, a portfolio manager at Villere & Co. Young is planning on taking advantage of any Omicron-induced volatility to add to stocks that rely on tourism and travel such as bank company First Hawaiian (NASDAQ:) Inc. Shares of the company are up 14.4% for the year to date.

According to World Health Organization (WHO), Omicron can cause infections to increase by as much as 80% in just 1.5 to 3 days. It now represents 73%, an increase from the 1% reported at the start of the month. [L1N2T60ZU]

Still, questions about Omicron’s virulence have made investors less pessimistic than the original reaction when the S&P 500 fell 2.3% when the variant was discovered on fears of fresh economic lockdowns.

South African researchers offered optimism about Omicron’s severity and the trends in COVID-19-related infections Wednesday. Investors expect that the Omicron variant will have a limited impact on vaccine manufacturers’ shares, which is why stocks of these companies fell in December.

This bodes well to what’s known as the Santa Claus rally in markets. Data from CFRA Research shows that historically, U.S. stocks rose during the fifth to last trading day of December, and in January for 56 years out of 75. The time frame begins on December 27th this year. The average Santa Claus rally has boosted the S&P 500 by 1.3% since 1969, according to the Stock Trader’s Almanac.

Wall Street analysts don’t know how Omicron could impact earnings and the economy. Estimated 2022 S&P 500 earnings growth was at 8.3% as of Friday, compared with 8.0% at the start of December, according to Refinitiv data.

Goldman Sachs (NYSE:) cut its estimate https://www.reuters.com/markets/us/goldman-sachs-cuts-us-gdp-growth-forecast-2022-over-omicron-fears-2021-12-04 for U.S. GDP growth to 3.8% from 4.2% due to the uncertainty of the impact of the Omicron wave.

POSSIBLE VOLATILITY

Omicron’s economic impact will be significant, however, U.S. consumer spending is expected to remain high, stated Cliff Hodge of Cornerstone Wealth, chief investment officer.

He is focused on any signs that Senator Joe Manchin could reach an agreement to support President Joe Biden’s signature $1.75 trillion Build Back Better https://www.reuters.com/world/us/biden-says-he-manchin-are-going-get-something-done-2021-12-21 climate and social spending bill. Manchin would be one of the crucial votes in passing the bill in divided Senate. He stated on Sunday that he couldn’t support it in the current form. Chuck Schumer, Senate Majority leader, said the Senate will be voting on the bill by January 1.

Hodge explained that they need some positive news, whether it be on Omicron front or Manchin. This will help us get the rally started. “We’re fully invested, and we anticipate some relief rallies into January.”

The week ahead will be light on economic data, with the release of the S&P Case-Shiller U.S. home price index on Tuesday among the few notable data points.

The lack of new reads of the strength of the economy at a time when coronavirus case counts are rising may leave the stock market more volatile through the end of the year, said Dana D’Auria, co-chief investment officer of Envestnet (NYSE:) PMC.

She said that the market is now able to price in and lead off of what they are learning on the health side.

D’Auria stated that if Omicron cases increase or economic signs are reimposed investors may rebalance to the shares of technology giants such as Apple Inc (NASDAQ) which have become defensive plays due to their high cash position and increased revenue as a result remote work.

She said that Omicron could cause real problems and she would be prepared for volatile markets well into next year.