The new virus variant and the growing realization that the era of ultra-low interest rates may be passing combined to encourage investors to take chips off the table in December.

A monthly measure of investors’ buying and selling activity showed that their optimism crashed in December 2021 as central banks such as the US Federal Reserve took a more hawkish stance on monetary policy to handle inflation worries. The emergence of Omicron also rattled sentiment.

The findings come from State Street Global Markets, in its State Street Investor Confidence Index®. The Index fell to 85.6, a drop of 25.9 points from November’s revised reading of 111.5. The European ICI drove the decline, plunging 27.8 points to 67.6. The North American and Asian ICIs fell by double digits, with the North American ICI falling 14.0 points to 96.4, and the Asian ICI falling 12.4 points to 95.2.

“The sudden emergence of Omicron and the hawkish pivot from the Fed drove some of most volatile swings in the equity markets all year. Sentiment in Europe was the weakest, with many EU countries again implementing travel and mobility restrictions, while North America registered its seventh biggest monthly decline,” Marvin Loh, senior macro strategist at State Street Global Markets, said. 

“Despite weakening sentiment, other equity indices are ending the year near their all-time highs, as recent signs emerge that Omicron is less virulent than previous variants. Positive Investor sentiment will nonetheless be challenged by tightening financial conditions, high inflation and fiscal headwinds as we start 2022,” Loh said. 

Sharp rises to inflation in the US, the UK and other parts of the world, coming after huge central bank money printing to handle the pandemic impact, as well as disruptions to energy markets, have hit sentiment.

The US Fed recently signaled that it intends to accelerate its tapering of quantitative easing; the UK’s Bank of England slightly raised official interest rates in December. 

The index measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors. The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets.