S&P 500 retreats from record highs on Omicron concerns and ahead of Fed monetary decision

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Vrasidas Neofytou
Head of Investment Research

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S&P 500 retreats from record highs on Omicron concerns and ahead of Fed monetary decision

S&P 500 index retreats from recent record highs as investors are concerned over the impact of the highly mutated Omicron covid variant on the global economic growth and ahead of the highly awaited monetary decision by the U.S. Federal Reserve this week.

Risk-off mood over Omicron variant fear:

Risk aversion sentiment hit the global stocks on Monday after UK Prime Minister Boris Johnson confirmed Britain’s first death linked to the new Omicron variant, warning of a "tidal wave" of new cases, while the World Health Organization said it poses a "very high" global risk, with some evidence that it evades vaccine protection.

Hence, UK Health secretary Sajid Javid said Omicron strain accounts for 20% of confirmed COVID-19 cases in England, while the estimated number of daily infections is about 200,000, forcing Johnson’s administration to open hundreds more vaccination sites in the coming days to ramp up the delivery of booster shots.

Market reaction:

The S&P 500 index pulled back by nearly 1% from Monday’s record closing highs (its 67th record high of 2021), led by losses in tech giants Microsoft, Tesla, Apple, and Nvidia, while the industrial Dow Jones fell 0,9% following a general risk-off mood in global markets driven by the growing worries over the first death from Omicron variant in the UK and the first Omicron-led covid cluster in China.

S&P 500 index, Daily chart

Risk appetite turned around, with investors selling stocks that benefit from the reopening of the economy after the pandemic such as airlines, cruise lines, energy, retail, and financials.

Yet, the most losses were found in the tech-heavy Nasdaq Composite, which dropped by almost 1,5%, as traders rotated out of high-leveraged technology stocks with inflated valuations and huge debts, making them vulnerable to the coming higher interest rates.

Federal Reserve monetary decision:

The world’s largest central bank Federal Reserve kicks off a two-day policy-setting meeting later today, while the chairman Jerome Powell is going to host a press conference tomorrow afternoon discussing the bank’s Q4 projections for the U.S. economy, elevating inflation, and possible rate hikes.

The market is looking for any clues regarding how fast the Fed will taper its bond-buying program, an $120b per month purchases of U.S. Treasuries and agency mortgage-backed securities (MBS) which ends in June 2022, and any signals for interest rate hikes in 2022 and beyond, to fight the surging inflation, as the U.S. Consumer Price Index (CPI) rose to 6,8% in November.

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