One of the tragedies of the Delta variant is that its impact in developed nations like the U.S. could be significantly muted if more of the unvaccinated got the injections. Experts expect a large majority of Americans who are unvaccinated or had the disease previously to be infected this time around. The Delta variant is far more contagious than prior mutations although the severity of the disease appears to be about the same. Because the percentage of people vaccinated rises with age, this time around, it is younger Americans who are getting infected. That may keep both the hospitalization and death rates down. As we see in pockets of the Midwest and South, in regions where vaccination rates are low, hospitals are filling up and deaths are once again escalating.
Futures are down again this morning suggesting that fears continue to elevate. However, this surge is likely to be different than prior ones. Last year, the response to rapid spread was quarantine and isolation. That won’t happen again. Our economy is almost fully reopened. Americans don’t have the appetite to go back into a cocoon a second time. The obvious alternative is to get vaccinated. Unless those unvaccinated react quickly, the two-shot variants may not be an answer as it takes about 7 weeks from the time of the first shot to get maximum immunity. On a short-term basis, the one-shot alternatives may be better choices.
We live in a world dominated by social media. In the case of Covid-19, social media has been more foe than friend as countless unverified tales of vaccine woe spread rapidly. The vaccines don’t provide perfect immunity and there are rare side effects to be considered. The factual risk/reward certainly seems to favor getting the shot.
I am not a doctor or a scientist. My role here is as an economic interpreter. The obvious question is whether the spread of the Delta variant will meaningfully impact the economy and the stock market.
In the short-term, it will have some impact. The future shape of the Tokyo Olympics is uncertain. Anyone unvaccinated will not be able to cruise without supplemental insurance and that will be very expensive. Should there be a spike in New York over the next several weeks, Broadway openings may be pushed back and altered in some way. However, all one needs to do is look back to the spring of 2020 when investors panicked as the virus first spread. Clearly, with hindsight, they overreacted. Yes, the world went into virtual shutdown for about 2-3 months and then gradually reopened, but equity valuations are hardly impacted by short-term events. This time around offices are reopening, sports venues now have people instead of cardboard cutouts in the seats, and schools will start again in the fall, hopefully all in person. Once again, there is time for students and teachers to get vaccinated before school begins. Data shows that those vaccinated are highly unlikely to get sick and, if they do, the impact isn’t life threatening. Any efforts by teachers to keep learning virtual will be met by virulent pushback from students and parents.
Nonetheless, the lead stories in the media for the next few weeks will likely be the pace and path of the Delta variant.
The Delta variant isn’t the only concern for investors. As I noted last week, the market faces transitions, both in the pace of growth, and in future Fed policy. So far, long-term interest rates have stayed low within a narrow range. To the extent there is any selling in the equity markets, typical flight to safety suggests that rates on 10-year Treasuries may fall in the short-term. Earnings season only started last week. What we saw then was that outsized growth had been expected and largely already built into stock prices. Only true beat-and-raise quarters got investor attention. That is likely to continue.
We have also seen a rise in value of the large growth stocks with real earnings, at least until the last 2-3 sessions, together with a continuation of the steady fall in value of the widely speculative names. These would include SPACs, meme stocks, and growth names selling at 20 times sales or more without any earnings.
Warren Buffett likes to say you can’t tell who’s swimming naked until the tide goes out. We have not had a serious correction for many months. Perhaps the tide is starting to go out.
There are a few basic facts for investors to remember.
1. Don’t fight the Fed. The Fed has broadcasted that it intends to start tapering bond purchases in the near future. There will be a meeting this week during which members will discuss the timetable. They may not reach a definitive decision until the Jackson Hole meeting in August or the next FOMC meeting in September, but we all know it is coming. Tapering means less bond buying and less monetary accommodation. While future economic data can slow or change that trend, in all likelihood, the tailwind of super aggressive monetary easing will weaken over the coming months and years.
2. Economic growth is peaking. With or without the impact of the Delta variant, year-over-year growth will max out this quarter. Ultimately, the pace of growth will be dictated by demographics and productivity. For decades productivity has averaged about 2% and population growth is less than 1%. This suggests terminal economic growth won’t be far over 2%. In the short run, still accommodative monetary policy and, perhaps, even more fiscal spending will keep growth elevated. President Biden wants to lift government spending as a percentage of GDP by close to 5 percentage points. How much of what he wants will get through Congress is argumentative. So far, the Democrats have outlined what they want to spend. That’s the easy part. The hard part is how to pay for everything. Democrats insist whatever they spend will be paid for entirely by rich Americans and corporations. It is uncertain whether all Americans will buy that assessment. In addition, rich Americans and corporations fund campaigns. The Democrats need almost complete unanimous support to get legislation passed via reconciliation. The one piece that may pass with 60 votes, infrastructure, is already in trouble lacking full funding. The devil is always in the details.
3. No recession is in sight. Decelerating growth doesn’t mean no growth. It means a return to normal. As the Fed backs away, assuming it actually follows through on its game plan, interest rates are likely to return to their 2009-2020 range.
Transition is here. The road ahead gets bumpier but there shouldn’t be any sinkholes. What remains is enormous liquidity. In 2009, we exited a financial crisis. People still in their homes found their equity values had withered to zero or below. Unemployment was near 10%. College graduates could not find jobs. Excess capacity took a decade to absorb. Post-pandemic, full employment is in sight. There are shortages everywhere. The Fed labels them transient. Some are; some probably will take years to resolve. The economic world is overwhelmed with liquidity. The consequences of that liquidity will be the subject of my letter Wednesday.
Today’s conclusion is that the Delta variant’s impact is going to be real but transitory. Its economic impact will be far greater overseas than in the U.S. or other developed nations where a large percentage of the population is either vaccinated or has the opportunity to get vaccinated. Whatever the impact, we have learned that Covid-19 surges last a few months and then subside. By the time the Delta variant runs its course, a large portion of the world will have either contracted the disease or will have been vaccinated. It is likely to be the final significant surge. That suggests, investors will soon look past this surge to future economic prospects. There could be an interim correction, but it will not likely be enduring.
Today, actor Benedict Cumberbatch is 45. Former Starbucks CEO Howard Schultz is 67. Queen guitarist Brian May turns 74.
James M. Meyer, CFA 610-260-2220