Omicron anxiety has recently rippled across markets. Over the past 18 months, how many times have we started to breathe sighs of relief that the pandemic was rounding the corner, only to be hit by second or third waves, the Delta variant, and now the Omicron variant? Fortunately, reports continue to suggest that despite the higher transmissibility, Omicron’s impact has not resulted in serious illness. However, since the emergence of the Omicron variant, companies with high valuations have been hit hard. There has also been a decent amount of disparity in performance among large-cap and small-cap stocks, with the latter underperforming. This trend is not surprising and suggests that small caps may have an opportunity to outperform if we can manage Omicron.
During the pandemic-driven selloff of early 2020, the Russell 2000 slumped further than the S&P 500. But once vaccines became available, expectations for economic recovery helped propel a period of small-cap leadership. Similarly, if we can get through this latest COVID variant without disruptions, there is a good chance small caps will rebound as their fundamentals are attractive. Throughout the pandemic, the entire world has learned that the restrictions and/or lockdowns imposed cause the most economic damage.
At this stage in the global recovery, the rub is that the economic, supply chain, and inflation backdrop is significantly changed relative to prior waves/variants. The pandemic has exposed instability in complex global supply chains. Expect more talk about companies switching from just-in-time inventory management to just-in-case. We all have to wait to see if the effects of Omicron are significant; and whether they do more damage to demand and/or exacerbate supply chain problems.
We remind clients that investing is a disciplined process over time. That discipline should involve diversification and periodic rebalancing across and within asset classes. As we prepare for a new year, we need to remain alert to the risks of monetary policy, inflation, speculative froth, and ongoing virus concerns. But what ultimately matters is not what we know about the future; it’s what we do along the way. Cardinal Capital has spent the last thirty years building portfolios comprised of high-quality companies at reasonable valuations that provide superior risk-adjusted returns in both good and bad market environments.
As we approach the end of what has been, at times, a turbulent year in the financial markets, we are mindful of and thankful for the trust you have placed in us. Cardinal Capital Management has continued to grow, and we hope our investment philosophy has continued to serve you well. We wish you all a joyful holiday season.
