A Chief Market Strategist's advice amid the Omicron sell-off: 'Stay on the sideline, don’t panic'

Dennis DeBusschere, 22V Research President and Chief Market Strategist, joins Yahoo Finance to discuss the volatile day of trading on Wednesday.

Video Transcript

ADAM SHAPIRO: Much. Can we pull up-- let's pull up the indices again. I want to show everybody where we stand with the S&P 500, the Dow, and the NASDAQ. We are now in the red on all three. S&P 500 just barely in the red, but the Dow almost off 90 points, and you've got the NASDAQ down almost 100, 110 points.

Let's talk about this with Dennis DeBusschere, 22V Research President and Chief Market Strategist. Dennis, deep breath, because we were told there would be Omicron in the United States. United Airlines flies five weekly flights from Newark to South Africa. So, you've got to expect the next cases are going to be in this part of the country, on the East Coast. Why the big sell off if we knew this was coming?

DENNIS DEBUSSCHERE: Well, it's a good-- good question. I think the main reason is, and one of the things that was talked about today, even before the CDC announced that there was a case in San Francisco, was the potential for a very high R0. So, some of the stuff that's coming out of South Africa today suggests, and of course, this is very preliminary, that the R0 with the Omicron is significantly above Delta.

So, is it going to be so much more contagious and potentially have the same severity, and potentially breakthrough of vaccines, in which case, you have a much potentially more negative outcome. So, I think what people are struggling with today, and you know, we need a lot more data on this, is very high R0.

So, obviously, a lot more contagious, with potentially the same severity, which means you just see it spread really quickly through the United States. And that could lead to a sharper pullback in services, a very sharp deterioration in travel, et cetera, over the next couple of months, if that's the case.

And oh, plus, what if it's more severe? I'm not saying it will be, but I think what people are struggling with is the potential for it to be more severe. It looks like actually the data we have so far suggests it's not, but if it was, then you have a pretty nasty scenario.

And here we are at the end of the last month of the year, and I get it, seasonals are positive. But with the last month of the year with a very strong year. So, you know, probably a good time to take profits.

ADAM SHAPIRO: OK, so, we see people taking profits, but what should investors do in the next two weeks? Because they keep telling us, you need about two weeks to really get the complete data picture. And we should know better about severity because we will have had longer periods of outbreak in South Africa.

For instance, Israel already reporting some data. But in that two-week period, what should an investor do? Is this the time to just stay on the sidelines?

DENNIS DEBUSSCHERE: Stay on the sidelines, don't panic. To the extent that you're invested, I would not panic, because there's going to be, as we like to say in the business, a number of tape bombs. It seems clear that there's going to be one tweet after the other probably going each way in those next two weeks until we have more information.

That is going to be filled by I think a lot of more hysterical narratives. And I would encourage people, yeah, staying on a sideline is fine, but the extent that you're invested, I would not panic. Because it is-- we are in a much different place, both economically, and of course, with vaccinations, plus boosters, et cetera, that means we're probably not going to see the type of deterioration that happened, or anything close to that, two years ago.

ADAM SHAPIRO: You've also pointed out that we should still expect US demand to remain firm. What does a potential severe Omicron do to that? What I'm thinking about, though, is the fact that before most of us even had vaccines, the economy had started to recover. So, what is the past tell us, and how do we prepare as investors for the worst case scenario with Omicron?

DENNIS DEBUSSCHERE: Well, if it's a worst case scenario from an investing point of view, you do have to assume that there's going to be a deterioration in demand. By the way, again, we're not calling for that. We're actually very positive on demand growth going forward, but to the extent that you have a severe problem, for lack of a better term, demand is going to suffer.

In which case, defensives is going to be where you'll be investing it, because 10-year yields will come down, like they already are. Probably more, if it's significantly worse. And your defensive sector, the things are outperforming today quite frankly. So, your health care, utilities, and staples will outperform.

Also, your large cap tech. You're already seeing it with Apple. And so, that would continue. I think the risk is a lot of the things that tended to benefit from these COVID waves in the past are performing terribly right now, and that's an important distinction.

So, if you look at like, say, the software, ETF, if you look at unprofitable tech, things that's done pretty well in past COVID waves. They're doing pretty poorly and I would expect that to continue. This is much different than profitable tech-- unprofitable tech. I would expect that underperformance to continue pretty much in most scenarios.

But specifically, if it gets a lot worse, because real rates would go up. What happens in a bad scenario for the economy is inflation expectations come down. So, your real implied rate goes up, your cost of capital goes up, and that's very bad for the most speculative areas of the market.

ADAM SHAPIRO: I hear what you're saying. I want to make sure that we understand it. This could be a kind of back door not very welcome bit of relief, though for those who worried about inflation. I mean, I'm looking at oil right now. WTI was below $66 a barrel. I'm trying to pull it up on the computer as I say this, but WTI is-- where the hell did it go?

Well, it was below 66. Crude, there we are $65. So, are we going to get a relief, are we going to get a break because of this concern about Omicron regarding oil and energy in general?

DENNIS DEBUSSCHERE: Well, we're going to-- yeah, I mean, I think we're going to get a relief from inflation for a variety of reasons. I think we still don't know enough about Omicron. So, let's assume for a second that it's not a disaster and it's actually more of just a normal wave, and let's assume even lower severity.

Then you'll still have a good demand backdrop and lower inflation, because supply chains are easing. And what did Powell just do since basically over the last couple of days is eliminate the right tail risk of inflation. He just told you, hey, guys, transitory, forget about it. We lost that battle.

We're probably going to quicken up the taper process. We're going to be more reactionary to higher core inflation prints. So, he's taking out the right tail of inflation now. You throw this on top of it, then you have clearly downside risk to inflation, to your point. But even without that, you have some alleviation on some of the inflation fronts.

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