Omicron’s Likely Muted Impact on GDP and Longer-Term Outlook

The Omicron Variant’s Stress on Services

The rapidly-spreading Omicron variant is impacting a wide variety of services industries from airlines to restaurants to health care systems. While the risk of needing emergency care or hospital admission from Omicron is nearly half that of the Delta variant, the high transmissibility means that health care capacity is being strained in many areas of the U.S. and the globe.¹ Breakthrough infections of vaccinated individuals are prominent, however data from New York indicates unvaccinated individuals are 6x more likely to get infected and 14x more likely to require hospitalization.²

Ahead of the holiday season, we knew labor capacity was strained – there’s around 11 million available job openings, while the unemployment rate and initial claims level continue to trend downward. The labor shortage has since been further stressed due to the fast-spreading Omicron outbreak, forcing many to quarantine, albeit temporarily. Transit agencies have suspended service routes and/or reduced frequencies across the country³, airlines cancelled more than 10% of scheduled flights from Saturday through Monday (blaming weather or staffing)⁴ and hospitals are once again cancelling elective surgeries with multiple states deploying the National Guard to provide support.⁵

Cases are setting records, more workers are calling in sick and capacity is full.⁶ To ease the labor shortages, the CDC shortened their recommended isolation period to five days if asymptomatic or if symptoms are resolving. The short-term outlook may be bleak and frustrating, though a longer-term bounce back and minimal impact on long-term GDP should support markets and offer hope.

Expecting GDP and Businesses to Bounce Back Longer-Term

While Omicron will likely impact Q1 GDP and maybe Q2, we expect a rebound in H2 and still think above-trend growth will continue. Labor shortages because of Omicron’s spread are likely to disrupt businesses for the next few weeks before subsiding. Longer term, the highly contagious but less deadly variant could help us get closer to herd immunity and offer a bullish setup for H2 – specifically for service industries and reopening trades.

Financials outperformed during the first two days of the year, as has energy. Outperformance in financials suggests continued expectations for a rising yield curve and tightening Fed policy, consistent with expectations of a strong consumer demand environment. Energy outperformance signals the market’s expectation for pent-up travel demand and demand for fuel. Companies have continued to underscore the strong demand environment and forecast additional investments in labor, logistics, productivity and capacity. Broad-based, elevated free cash flow and continued demand will help to support both an increase in return-to-shareholder programs (dividends and buybacks) and capex.

We expect the recovery in enterprise spend to continue through 2022 and a significant demand for capex as companies continue to face severe supply chain disruptions. Elevated earnings in 2021 resulted in a contraction of P/E multiples, providing ample opportunities for buying quality names at attractive valuations. In 2022, we continue our barbell approach to portfolio management, focusing on high conviction, quality companies with pricing power and secular tailwinds.

Chart: NTM P/E Contraction in 2021⁷

Stephanie Link: CNBC TV Schedule

Sources

1. Bloomberg
2. NBC New York
3. Reuters
4. New York Times
5. Washington Post
6. Denver Post, NPR
7. Credit Suisse

Disclosures

Investment Solutions at Hightower Advisors is a team of investment professionals registered with Hightower Securities, LLC, member FINRA/SIPC, & Hightower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through Hightower Securities, LLC and advisory services are offered through Hightower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources; as such, neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of Hightower Advisors, LLC or any of its affiliates.