Written By: Doug Blanton, CFA®
After reaching all-time high levels in June, markets have begun to price in the possibility of a new, highly contagious COVID-19 variant that is disrupting the global economic recovery. The Delta variant of COVID-19 is considerably more contagious, spreading 50% faster than the Alpha variant, which spread 50% more quickly than the original strain of COVID-19 (source: Yale Medicine). The accelerated spread rate is leading to a spike in new cases across the globe. While the trend is not favorable, data suggest the rise is nowhere near as menacing to the economy as some headlines imply.
Early evidence indicates the authorized vaccines prevent severe symptoms, hospitalization, and death from the Delta variant. Most Delta variant cases have come from unvaccinated or partially vaccinated patients, leading to concerns for those regions with the lowest vaccination rates. We fully expect case numbers and hospitalizations to rise in the coming weeks given the highly contagious nature of this new strain. However, we do not believe a full-blown second wave of this pandemic will materialize given the impressive pace of vaccinations worldwide. In just 7 months over 55% of the U.S. population has been fully vaccinated. Over 25% of the world’s population has received at least 1 vaccine dose, with over 29 million doses being administered each day. Given there is still considerable work to be done to reach herd immunity, it is reasonable to expect a spike in cases, particularly in those regions with low vaccine levels.
As the summer progresses, expect to see tightening travel restrictions and other protective measures in some areas of the world as numbers rise, leading to an uptick in delivery times and supply chain delays. Areas of the economy that were beginning to get back on track, like tourism and other consumer’s discretionary spending, may also subside from the rapid pace of recovery seen since the beginning of the year. However, it is expected to be a temporary setback without the sting experienced during the initial COVID-19 outbreak last year.
As would be expected, equity markets are reacting negatively to these developments. The energy sector has taken the biggest beating, down 11% in the last week. The financial services, consumer cyclical, and basic materials sectors are all down more than 4.5% in the last week as well. The bond market has also been impacted by virus-related concerns. When investors reduce the risk in their portfolios by buying bonds, that pushes bond prices up, which in turn reduces the yield for bonds. We can see this effect by looking at the 10-year treasury yield which closed at 1.19% on July 19th, compared to 1.45% a month ago and 1.38% a week ago.
Needless to say, this is likely not the last variant to cause concern. Eventually, the virus may outsmart the vaccines, at which time we would be much more concerned about the recovery. Experts believe this is not likely to happen for several years given the current pace of mutation. By then the hope is we eradicate the virus or produce an updated version of the vaccine. Tests are being conducted by the major pharmaceutical companies to determine whether an additional booster shot would be helpful against new variants. Initial indications are positive this method of defense would be effective.
This pandemic will be with us for some time to come. Our view is the worst is behind us, and over the next two years, the global economy will continue to experience a strong economic recovery as inventories are replenished and activity increases. The market volatility caused by temporary surges in new cases of the virus may present buying opportunities for those who can see through the fog of this pandemic. Stay focused on long-term objectives and talk to your financial advisor if you have questions or concerns.
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