Delta Variant and the Markets: What Investors Need to Know
The SARS-CoV-2 Delta variant, a fourth lineage version of the original COVID-19 virus, is now believed to be the predominant strain of the virus and responsible for a resurgence of cases globally and in the U.S. In addition to the medical concerns resulting from these reversing COVID-19 case trends, the Delta variant has also created a stir in the equity and fixed income markets and is believed to have contributed to recent downside volatility in stocks and falling longer-term bond yields.
The Delta variant’s impact on current COVID-19 case trends and recent market volatility
Over the past month, the Delta variant is believed to be the primary culprit pertaining to the reversing direction of COVID-19 case trends. Specifically, in regard to COVID-19 data for the week ending July 18:
- The seven-day average of daily COVID-19 new cases increased to more than 33,000, almost triple the average number of 12,000 recorded during the week of June 20 (Source: Worldometer).
- Active COVID-19 cases (confirmed cases less recoveries and fatalities) increased for the first time since late January, moving to 4.92 million from 4.87 million. (Worldometer).
- Total recoveries as a percentage of total cases decreased for the first time since early January, falling from 84.2% to 84.0%. (Worldometer).
These trends have not only caught the eye of the medical community but also the financial markets, where major stock indexes such as the Dow Jones Industrial Average and S&P 500® have experienced sharp daily declines. The 10-year Treasury yield has continuously fallen over the past several weeks, as well, from over 1.60% in early June to less than 1.20% as of the market close on July 19.
Initial data suggests a more contagious but less severe profile for the Delta variant and one in which current vaccines appear to provide efficacy
Although COVID-19 case numbers are once again rising, fatality rates appear to be declining. This is perhaps best exemplified in the seven-day average fatality rate for the same week ending July 19, which was 272 and below the seven-day average of 302 for the week ending June 20, which included about 60% fewer cases (Worldometer). While a lag or longer-term fatality tail could wind up being inherent to the Delta variant, this so far does not appear to be the case.
The data is still fluid, but early evidence strongly infers existing vaccines are highly effective against the Delta variant. This is coming from three primary source areas:
- Specific studies of vaccine efficacy, such as Public Health England’s analysis that reported two doses of the Pfizer-BioNtech vaccine was 96% effective in preventing hospitalization caused by the Delta variant.
- Analysis showing the vaccines have generated neutralizing antibody responses to the Delta variant, such as in studies administered by Johnson & Johnson and Moderna.
- Data from numerous sources nationwide reporting the overwhelming majority of new COVID cases, which presumably are being driven by the surge in the Delta variant, appear to be among unvaccinated individuals. For example, the Louisiana Department of Health has reported that 97% of new cases since February have come from those who did not receive vaccines.
On a fatality scale, the unvaccinated ratio seems to be even higher, at least as expressed by Dr. Rochelle Walensky, Director of the Centers for Disease Control and Prevention. On July 8, she said, “We also know that our authorized vaccines prevent severe disease, hospitalization, and death from the Delta variant,” and, “Preliminary data over the past few months suggests that 99.5% of deaths from COVID-19 in the U.S. were in unvaccinated people.”
The Delta variant seems to be building a profile of being more contagious than the original COVID-19 strain, but less severe in terms of hospitalizations and fatalities. Moreover, initial evidence, both clinical and anecdotal, also seems to suggest the existing vaccines protect well against it. For these reasons, many within the medical communities are referring to the Delta variant as a “split pandemic,” with the major risks separated between those who are fully vaccinated and those who are not.
Determining the Delta variant’s market impact looking forward
The big question on the minds of investors seems to surround the probability of the Delta variant materially impacting anticipated reopenings and consumer behavior to the extent economic and corporate earnings growth are negatively affected. We see this as a less likely scenario for the following reasons:
- Should Delta variant infection rates indeed prove to be primarily determined by vaccination profiles, we believe public officials will have a challenging time imposing shutdowns or social distancing restrictions on those who have been fully vaccinated. In addition, there is a high probability, in our opinion, that those who are fully vaccinated are likely to increase consumer activity as the economy further reopens.
- As we have mentioned in previous commentaries, pent-up demand expected to be unleashed into the economy during the upcoming several months should play a major role in an expected V-shape recovery for gross domestic product (GDP) and corporate earnings by the end of CY 2021. At this point, it appears as though it would require a dramatic change in reopening expectations to derail these expectations.
- Given that approximately 60% of the U.S. adult population has been fully vaccinated, we see consumer spending as likely extremely strong for the remainder of 2021 and into 2022. This, in our judgment, should help the U.S. economy achieve approximately 7% GDP growth for CY 2021 and S&P 500 operating earnings growth to exceed 35% growth versus last year.
The Delta variant has clearly emerged in recent weeks as a major variable potentially impacting the markets in the year ahead. While current and future case trends will undoubtedly be watched closely moving forward, at the present time we believe initial outcome results pertaining to severe cases and fatalities would need to worsen considerably to adversely affect the existing economic momentum anticipated in the months ahead.
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.
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