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Assessing Recent Market Volatility

Tom Wald, CFA®, Chief Investment Officer, Transamerica Asset Management, Inc.

Stocks have seen sharp declines in recent days, as the Dow Jones Industrial Average and S&P 500® both experienced 3% declines across consecutive trading sessions concluding July 19. In regard to this recent market volatility, we view the following developments and points of consideration as important for investors.

Rising COVID-19 cases resulting from the Delta variant. In the past couple of weeks, COVID-19 cases have reversed trend with daily increases now reaching levels not seen since early May and active cases once again rising for the first time since January. While this has been a major source of recent volatility, so far, the great majority of Delta variant cases resulting in hospitalizations appear to be occurring among those who have not yet been vaccinated.

This recent reversal in COVID-19 trends is creating concerns about the pace of economic growth, though we remain confident in current gross domestic product (GDP) and corporate earnings growth expectations. The question now surfacing is whether this recent uptick in COVID-19 cases driven by the Delta variant will result in new shutdowns or a slowing of the reopenings expected to drive economic growth in 2H 2021 and beyond. We do not think so, based, in large part, on what seems to be lower hospitalization and fatality rates of the variant as well as medical data that so far seems to strongly infer those vaccinated have meaningful protection against it. We continue to believe the U.S. economy is capable of 7% or better GDP growth for CY 2021 and annualized S&P 500® operating earnings growth will exceed 35%.

These new COVID-19 concerns are coinciding with rising inflation reports displaying price increases not seen in decades. The June consumer price index report posted year-over-year headline inflation of 5.4% (highest since 2008) and core inflation of 4.5% (highest since 1991). This has also created market jitters, particularly as the combination of potentially lower than expected economic growth and higher inflation is not a welcome one. That said, we believe base effects comparisons should begin to mitigate as the year concludes, and we also see large price increases subsiding within a select few business areas currently skewing inflation calculations (such as used cars, car rentals, airlines, hotels, and lodging). While we believe inflation is likely to continue running hot for most of the remaining calendar year, we believe it will likely revert close to 2% by the early months of 2022 (please see “Rising Inflation: What Investors Need to Know”).

Recent decline in long-term interest rates also creating market angst. The 10-year Treasury yield closed on July 19 at 1.19%, continuing a marked decline from its high of 1.78% at the end of March. While there has been some theorizing that this is in part due to technical trading and pension fund asset allocation realignment, we believe the downward move in yields represents bond market concerns that current economic growth expectations may not be met in the months ahead. We remain confident in GDP and corporate earnings growth confirming the completion of a V-shape recovery from last year and the transition from a recovery to expansionary mode. We also believe the 10-year Treasury yield will likely reverse its current downward course and ultimately challenge 2% in the year ahead.

Correction risk is running high but, under current market conditions, we view such a development as a buying opportunity. As we have said many times in previous commentaries, we view the risk of a 10% decline off recent major stock index record levels as currently running high, but we believe this is likely more a result of history and human nature rather than market fundamentals. Since 1950, the S&P 500® has experienced 36 market sell-offs of 10% or more, averaging about 18 months between them, and only on four occasions since then has it more than doubled without a correction. As of the most recent record high, (intraday 4,386 on July 14), the S&P 500® had appreciated almost exactly 100% since its low point of the COVID-19 sell-off on March 23, 2020. All considered and based on current market conditions, we would likely view a 10% correction as a buying opportunity.

There is no question that recent market cross currents are sending investors mixed signals. These include a directional turn in COVID-19 case trends, rising inflation, declining long-term bond yields, and, of course, a doubling in stock prices within the S&P 500® since the depths of last year, perhaps nudging at profit-taking instincts as these concerns seek to be resolved. However, in looking at them individually and gauging the collective opportunities driven by what should be exceptional economic and corporate earnings growth amid historically low short-term interest rates and what we would consider to be reasonable to attractively priced valuations, we continue to see further upside for stocks through 2H 2021 and into 2022. We maintain our CY 2021 year-end price target on the S&P 500® of 4,600 and one-year price target of 4,800.


Investments are subject to market risk, including the loss of principal. Asset classes or investment strategies described may not be suitable for all investors.

Past performance does not guarantee future results.

Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods of time.

Fixed income investing is subject to credit rate risk, interest rate risk, and inflation risk. Credit risk is the risk that the issuer of a bond won’t meet their payments. Inflation risk is the risk that inflation could outpace a bond’s interest income. Interest rate risk is the risk that fluctuations in interest rates will affect the price of a bond. Investing in floating rate loans may be subject to greater volatility and increased risks.

Growth stocks typically are particularly sensitive to market movements and may involve larger price swings because their market prices tend to reflect future expectations. Growth stocks as a group may be out of favor and underperform the overall equity market for a long period of time, for example, while the market favors “value” stocks.

Investments in global/international markets involve risks not associated with U.S. markets, such as currency fluctuations, adverse social and political developments, and the relatively small size and lesser liquidity of some markets. These risks may be greater in emerging markets.

The COVID-19 pandemic has caused substantial market disruption and dislocation around the world including the U.S. Economies and financial markets throughout the world are increasingly interconnected. Economic, financial, or political events, trading and tariff arrangements, terrorism, technology and data interruptions, natural disasters, and other circumstances in one or more countries or regions could be highly disruptive to, and have profound impacts on, global economies or markets.

The information included in this document should not be construed as investment advice or a recommendation for the purchase or sale of any security. This material contains general information only on investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs, or financial situation. The value of any investment may fluctuate. This information has been developed by Transamerica Asset Management, Inc. and may incorporate third-party data, text, images, and other content to be deemed reliable.

Comments and general market-related projections are based on information available at the time of writing and believed to be accurate; are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for future investing. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions.

Transamerica Asset Management, Inc. is an SEC-registered investment adviser. The funds advised and sponsored by Transamerica Asset Management, Inc. include Transamerica Funds, Transamerica Series Trust and DeltaShares® exchange-traded funds. Transamerica Asset Management, Inc., is an indirect wholly owned subsidiary of Aegon N.V., an international life insurance, pension, and asset management company. 1801 California Street, Denver, CO 80202, USA