Even as the omicron Covid variant continues to surge across the U.S., investors are already looking past its peak and focusing on a new type of reopening trade. The variant is spreading rapidly and has infected millions. Many companies have told workers to stay home temporarily, and businesses are struggling with high absentee rates . The wave is expected to slow travel, dining out, shopping and other activities, as it works its way through the population, but investors are looking forward to the point where the variant recedes in the not-too-distant future. "New U.S. Covid cases have roughly doubled over the past week, but the market appears to be embracing it," wrote Wells Fargo equity strategists Friday afternoon. In the past week, some trades that do better in an improving economy did well. Value has outperformed growth, and some cyclical sectors have been outperforming, as technology and growth declined. Financials were up more than 5% on the week. Airlines were up nearly 7%, and the broader aviation U.S.Global Jets ETF was up 5.3% for the week. The cyclical energy sector was a standout with a more than 10.5% gain, but oil prices were buoyed by geopolitical concerns. Treasury yields had been depressed last month by worries about the omicron variant, but that has clearly changed and interest rates began responding to a more hawkish Federal Reserve instead. The 10-year Treasury yield snapped higher this past week, moving the most in the first week of a new year since 2003. Certainly higher interest rates go hand-in-hand with an improving economy and also rising inflation. The Fed has forecast it could raise rates by a quarter point three times this year and roll back other stimulus. As a result, the spike in the 10-year yield this past week jolted technology and growth stocks, and the Nasdaq fell 4.5%. The closely watched 10-year rose as high as 1.8% Friday, after finishing 2021 at 1.51%. Some bond strategists expect the yield to continue moving higher and possibly reach 2% in the near future. Strategists say if the Fed was fearful about Covid, it might not be signaling so much confidence about raising interest rates. Central bankers are now much more concerned about rising inflation. At the same time rates are rising, a reopening trade that favors cyclicals or value over growth has been picking up steam. In the past week, the iShares S & P 500 Value ETF gained 1.1%, while the iShares S & P 500 Growth ETF lost 4.5%. The cyclical financial sector has come into favor, since it should be a beneficiary of rising interest rates. The Financial Sector Select SPDR Fund ETF was up 5.4% in the past week. Wells Fargo strategists said that they see a clear shift in the market's view about Covid, and while cases are rising rapidly, deaths are not rising dramatically. They also said based on South Africa's experience omicron in the U.S. "is likely to fizzle out over the coming weeks and could provide widespread immunity against severe health effects." Patrick Palfrey, senior equity strategist at Credit Suisse, said investors are already looking to a peak in Covid and are trading a new reopening. The sell-off in tech and growth and rising rates is part of it. "They're looking at South Africa trends. They're looking at hospitalization rates .There's enough data out there to give a more hopeful view on omicron," he said. Palfrey said investors should not give up on tech , but he expects it to lag. Technology had been one of the biggest beneficiaries in the stay-at-home trade and did well into the end of last year. Palfrey expects some parts of tech to do better. "The areas that are more cyclically oriented, more economically exposed," he said. "It's more semis, more hardware and less software. The flavor of tech leadership is likely to look a lot different in this environment." The broad S & P information technology sector was down 4.7% on the week, while the software sub-sector was off 7.5%. Semiconductors and semiconductor equipment lost 5%. "There are many places in the market where valuations are compelling. There are cyclical stocks, small caps and international stocks," Palfrey said. Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, said he does not favor playing a "style rotation." Investors have been burned trying to time the revival of value over growth. He said being stylistically diversified and focusing on quality companies is more important. He currently overweights technology and health care and also cyclical industrials, energy and financials. The sell-off in technology is likely to continue, but he expects tech shares to steady as the market adjusts to higher rates and valuations decline. Grohowski expects the 10-year yield to reach 2.25% by year end, and the road there for the stock market could be bumpy. "We are underweight staples," he said . "You want to be underweight in utilities and real estate." Grohowski said the market has already been looking through omicron. "Most studies and data show that the peak in omicron is likely to be measured in weeks from here, possibly months, but certainly not quarters," Grohowski said. "The market challenges of this week has little to do with omicron. It's really the Fed. This is the economy, inflation and the labor market being tight and forcing the Fed to pivot."
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, January 6, 2022.
Brendan McDermid | Reuters
Even as the omicron Covid variant continues to surge across the U.S., investors are already looking past its peak and focusing on a new type of reopening trade.