How COVID continues to impact the markets and economy

February 11, 2022 | Market news

At the two-year anniversary of the pandemic, COVID-19 remains a persistent concern and continues to create economic challenges in the U.S. and across the world. Reverberations from new COVID-19 developments periodically impact the investment markets, as was apparent when word of the new Omicron variant emerged in the closing weeks of 2021.

How will the evolving COVID-19 environment impact the markets and economy going forward? Investment leaders from U.S. Bank offer their assessment.

An evolving virus

There’s been significant anticipation for the time when the world overcomes the pandemic and can return to something approaching the “normal” state that existed before. Vaccinations are thought to play a key role in achieving this status, though it has yet to put COVID-19 under control. In the U.S., more people died from the coronavirus in 2021 then in 2020, even with the availability of the vaccine for much of 2021. New variants such as Delta and Omicron are testing the effectiveness of vaccines.

A major hurdle in slowing or stopping the pandemic is to increase the percentage of the population that is vaccinated. The U.S. has still not achieved what would be considered a level of immunization that could ultimately defeat the virus. A large group of Americans are hesitant to receive the vaccine or are ardently opposed to it. As a result, immunity on a societal scale remains elusive. At the same time, it became apparent that vaccines received earlier offered a waning level of protection, leading health officials to encourage those who received the final vaccination dose six months prior or longer to obtain a booster shot.

COVID-19 Full Vaccination Levels in U.S.1

Age group

% age fully vaccinated

% age w/booster shot

Total U.S. population



Population 5+ years



Population 12+ years



Population 18+ years



Population 65+



In mid-2021, the rise of the Delta variant led to a reversal of what in earlier months had been a decline in COVID-19 activity. Infection rates, hospitalizations and deaths from COVID-19 again climbed significantly. The unvaccinated have been most susceptible to infection. Based on the available data, this group also appears to be more at risk of serious illness or death. In late 2021, as COVID-19 infections in the U.S. began to decline in most states, the new Omicron variant entered the picture. It appears to be highly transmissible and in early 2022, COVID infection numbers reached record levels in the U.S. Additionally, there seems to be more potential for “breakthrough” cases among vaccinated individuals than was the case with previous variants, although vaccination helps lower the risk of serious illness or death. While it raises new concerns, there are signs that those infected with the Omicron variant generally experience less serious health effects than was the case with previous variants. Nevertheless, the rapid rise of Omicron in the winter of 2021-22 added a level of uncertainty about what lies ahead.

Other factors that could play a role in COVID-19’s longevity in the U.S. include:

  • The end of vaccine mandates by governments and private businesses, following successful court challenges that fought against the mandates.
  • The degree of reception to booster shots among those already vaccinated. There are signs that shots received earlier may have a diminishing impact in terms of providing protection against current and future variants of the coronavirus.

A resilient economy in search of normalcy

The expectation since the start of the pandemic has been a two-horizon scenario for the economy. The first horizon, which has been in place since the middle of 2020, represents reopening activity around the globe as society makes adjustments to life with COVID-19 as a lingering concern. The second horizon is when the economy achieves a “steady state” that more closely resembles conditions in pre-pandemic times. Investors may be anxious to see the economy reach that second horizon.

“We’re not there yet,” says Tom Hainlin, national investment strategist, U.S. Bank. “The variants are a reminder of that. They continue to create material concerns about when we will return to normal.” Hainlin was encouraged by the performance of the available vaccines against the Delta variant, but notes that the level of protection may not be the same with Omicron. “We’re watching to see if the strains force countries and states to restrict movement, close schools and businesses and so forth.” Some nations already had tightened restrictions on their populations even prior to the emergence of the Omicron variant, and more started doing so once Omicron led to a surge in COVID-19 cases.

Despite this, the U.S. economy demonstrated significant strength in 2021, with Gross Domestic Product (GDP) growing by an annualized rate of 5.7% for the year.2 Investors remain encouraged by economic developments and for much of 2021, propelled major stock market indices such as the Dow Jones Industrial Average and Standard & Poor’s 500, to record levels, even after the emergence of Omicron. Markets did suffer a modest setback in the opening weeks of the year, likely attributed to a dramatic shift in monetary policy by the Federal Reserve in response to rapid acceleration of the inflation rate (7% in 2021).

Worldwide, governments have had varied approaches in handling COVID-19. “Some are mandating more prevention measures such as social distancing and vaccinations,” notes Eric Freedman, chief investment officer at U.S. Bank. The Omicron variant adds a new potential challenge in how to manage economies through another possible health crisis. “The ‘pandemic’ mindset is still firmly entrenched, and if that continues, it could create some concerns for economic growth going forward,” Freedman adds.

In the U.S., the rapid emergence of the Omicron variant resulted in more challenges across different segments of the economy. Increasing numbers of people were afflicted with the virus, leading to temporary staffing shortages that affected schools, health care services and airlines, among others. The ability of Omicron to spread quickly raised concerns that the economy could suffer some negative effects, but the extent of the impact remains an open issue.

How markets are trending

The stock market has demonstrated an ability to look past the impact of COVID-19 and focus on other factors. After a 33% decline in the S&P 500 in early 2020, the index has enjoyed a solid recovery that continued through 2021. “The market rally began in an environment of rising infections in the U.S.,” notes Rob Haworth, senior investment strategy director at U.S. Bank. “Investors looked right through those troubles and focused on the promise of economic growth in 2021 and beyond.” He points out that the market’s recovery was zeroed in on expectations for continued improvement in corporate profits, which have been borne out.

“Investors also reacted to strong fiscal and monetary stimulus,” says Hainlin. This included trillions of dollars in direct stimulus to taxpayers and businesses from multiple COVID relief plans passed by Congress and significant monetary stimulus by the Federal Reserve.

Hainlin notes that investors continued to demonstrate confidence in the ability of companies to meet profit expectations, and to this point, they haven’t been disappointed. “A stronger than expected recovery was reflected in corporate earnings, so it isn’t a surprise that markets have set new records in the process,” says Hainlin.

While the Omicron variant may impact markets in the near term, the longer-term outlook remains positive. “We’re of the view that if you have rising corporate earnings and low interest rates, it still bodes well for equities,” says Freedman. The environment is one Freedman refers to as a “glass half full” scenario that continues to favor equities given expectations of the economy moving in a positive direction again in 2022.

Over the course of the past two years, stock markets have periodically suffered setbacks in the wake of negative news related to COVID-19, but the declines have proven to be temporary in nature. Investors appear to be more focused on broader economic trends, and the virus is just one factor in that equation.

As for bonds, one of the best opportunities for now may be found in a riskier segments of the taxable bond market with non-agency mortgage-backed securities. For those with tax concerns, high-yield municipal bonds may be considered.

Risks to watch going forward

There are always risks to the investment markets. Among those Freedman says bear closer watching in the current environment are:

  • The potential that Omicron or other future variants will force more restrictions that slow the pace of economic growth.
  • A policy mistake by the Federal Reserve as it dramatically shifts its monetary policy. This includes winding down its current “quantitative easing” program (buying U.S. Treasury and mortgage-backed securities) and plans to begin increasing the federal funds rate in 2022. “A risk is that the Fed gets overly aggressive in trying to get the current inflation threat under control in terms of how it sets monetary policy, but that isn’t a material risk,” says Freedman.
  • A continued acceleration of federal government spending that requires more borrowing, perhaps resulting in higher interest rates.

It appears that more time will be needed as investors continue to wait for the emergence of a “steady state” and a more normal economic cycle. According to Freedman, “we expect some changes within consumer spending habits, and how businesses rethink their marketing strategies. We continue to monitor how these changes may yield investment opportunities.” It may take more time to fully delineate what stocks we believe will be best positioned for a post-pandemic environment that remains elusive in the near term.

Talk with your wealth professional to make sure your portfolio is positioned utilizing a long-term, well-diversified investment strategy that is consistent with your tolerance for risk.

Past performance is not a guarantee of future returns. Diversification and asset allocation do not guarantee returns or protect against losses.

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