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The stock market has turned rocky as the Omicron variant spreads globally, potentially hampering the economic recovery. But there may be more weighing on investor sentiment than an alarming spike in COVID-19 cases.

To be sure, the disappointing turn in the pandemic can’t be helping the stock market hold onto this year’s double-digit gains, driven by the rollout of vaccines, the reopening of economies and the strong recovery in employment.

In scenes reminiscent of the start of the pandemic, Quebec has mandated working from home for all non-essential workers, The Netherlands on the weekend ordered a national lockdown that will extend through the middle of January, the National Basketball Association is postponing games, and January’s World Economic Forum in Davos, Switzerland, has also been postponed.

Major equity indexes in Canada, the United States, Japan and Europe declined sharply on Monday. The CBOE Volatility Index – or VIX, a measure of expected volatility – jumped more than 16 per cent, indicating investors are on edge amid reports that some vaccines may have little or no effect on the coronavirus variant.

Yet a deeper look at the current bout of market volatility suggests that there may be other factors at work here, from extended equity valuations to shifting monetary policies.

“If worries about the spread of Omicron abated, stock markets would probably recover some of the ground they’ve lost recently. Nonetheless, we wouldn’t expect that to mark the beginning of another big rally,” Thomas Mathews, markets economist at Capital Economics, said in a note.

He said that the sell-off comes after a hawkish turn by major central banks as inflation rises. The U.S. Federal Reserve last week increased the pace of tapering bond purchases, winding down an important part of economic stimulus, and signalled three interest rate hikes next year. The Bank of England raised its key rate last week in a surprise move, and suggested more hikes are coming.

The shift could be rattling investors used to pandemic-era monetary policies that have underscored the argument in favour of holding stocks. Low rates have made technology stocks look especially attractive.

As well, equity markets have enjoyed a remarkable runup this year, raising concerns among some investors that stock prices were stretched relative to earnings.

“We aren’t among those who think the market as a whole is in a ‘bubble,’” Mr. Mathews said. But given how extended rallies have been, he added, “it would not be surprising if, in response to growing virus fears and hawkish central banks, some investors chose to take profits towards the end of the year.”

A look at specific moves within the stock market reveals that volatility isn’t always lining up with fears of widespread lockdowns. On Monday, Shopify Inc. fell harder than Air Canada – even though the e-commerce company has sailed through the pandemic while the airline has suffered through severe travel restrictions.

In a more striking example of how the Omicron variant might not be driving all investor sentiment, Carnival Corp., the cruise ship operator, gained 3.4 per cent in Monday trading. Conversely, Apple Inc., the technology behemoth, slipped 0.8 per cent.

Michael Hartnett, chief investment strategist at Bank of America, reaffirmed his defensive take on the stock market late last week, but not because of risks associated with the Omicron variant. Instead, he expects that concerns over high inflation will feed into worries about aggressive rate hikes and fears of a recession, which could lead to continuing market volatility.

“We remain defensive and bearish,” Mr. Hartnett said in a note. “Inflation is like a very high body temperature, and must be reduced via tightening or recession to return the body to normal and ensure future good health.”

Omicron is clearly a threat. But it’s not the only one investors should be worried about.

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