By David Randall

NEW YORK (Reuters) -Investors are closely watching the latest news 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.

The is now slightly ahead of Nov. 24, before the news about the variant reaching markets. Investors were more confident about the economic effects of the variant’s positive developments on Thursday. This resulted in a record close.

“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]

Investors are now less optimistic than they were before Omicron was discovered. The S&P 500 closed down 2.3% on Nov. 26 after 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. According to CFRA Research data, U.S. stock prices have historically risen in the five days before Christmas and the first day of January, 56 of the 75 years that has passed since 1945. 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 are not sure how Omicron will affect earnings or 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 would be voting on the bill by January 1.

Hodge stated that “We need some good news on Omicron or the Manchin front to get a rally moving.” “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.

“The market has become quite good at pricing in, and leading off from the information we’re learning about the health side,” she stated.

D’Auria explained that Omicron cases could continue to rise or there may be signs that economic restraints might be reimposed. Investors will likely rebalance towards shares of tech giants like Apple Inc (NASDAQ), D’Auria indicated. These companies have been positioned as defensive play because of their cash positions and the revenue growth that has resulted from remote work.

She stated that Omicron can cause serious problems, and would therefore be available to help in a volatile market.