JPMorgan: Omicron Will Have a ‘Diminishing Impact’ on the Economy

Despite increased market volatility following the news that the Omicron virus variant appears to be spreading, its impact on the economy is likely to be less profound than that of its predecessors, according to J.P. Morgan Asset Management.

David Kelly, chief global strategist at J.P. Morgan Asset Management, wrote in his weekly note that the “pandemic waves should have a diminishing impact on the economy” as people adapt to the new normal. He predicted that except for travel and entertainment, which heavily depend on in-person interactions, other sectors would see limited disruption. “Many people have simply mentally moved on from the pandemic and will not accept further restrictions on their activities,” Kelly wrote. “Others have adapted their lifestyles to be very efficient even in pandemic conditions, [by] conducting business over Zoom, buying online, and wearing masks into grocery stores.”

Kelly told Institutional Investor that investors should be aware of the different impacts that the variant might have on public health, the economy, and the markets. While nobody knows how virulent Omicron might turn out to be, a “reasonable guess” is that its impact on the economy will be less than that of previous waves, and its impact on markets less long-lasting. “I think the economy will keep on growing,” Kelly said in a phone interview. “We’ve seen that the market is quite resilient and resistant to these pandemic waves, so I don’t expect [the variant] on its own to cause the market to tumble.” 

Kelly and Stephanie Aliaga, a research analyst at JPMAM, also predicted that the November unemployment rate will come in at 4.5 percent, down 10 basis points from the previous month. Kelly anticipated that the unemployment rate will keep falling in early 2022, accompanied by strong wage growth and rising asset prices, both of which signal a robust economy. “We went into the fourth quarter with a lot of economic momentum,” Kelly said. “Even if Omicron does slow the economy a bit, I think the unemployment rate [will] come down because there’s a huge excess demand for labor. There are all these businesses desperately trying to hire people.”

As for central bank moves, Kelly said that the Fed is likely to continue its tapering schedule, because “it’s hard to generate momentum for these policy changes.” He further predicted that the Fed will wait until December of next year to raise interest rates. “Another pandemic wave would also likely end speculation concerning an early Fed rate hike,” Kelly wrote. He added that Fed Chair Jerome Powell would “stress the Fed’s willingness to adjust the pace of policy normalization” when testifying before the Senate Banking Committee on Tuesday.

Kelly suggested that investors should “look past the [pandemic] waves” when constructing portfolios. For long-term investors, that means focusing on the portfolio that’s going to do well once the pandemic is over, rather than fixating on the twists and turns that may be brought on by Omicron in the next few weeks.

“That means focusing on valuations,” Kelly concluded. “There is a very wide dispersion of valuations [in] the market. I think people should focus on the things that are priced cheaply right now.”