It’s Baaack: COVID Variant Roils Markets
In a world…that’s increasingly interconnected…a virus mutation threatens humankind with mass death and financial chaos.
Voice-over narration to a horror movie trailer? No, a summary of the scariest story in the news these days. If you thought the coronavirus pandemic was behind us, think again. Like a movie monster that refuses to die, COVID has mutated into a more lethal variant.
The Thing has nothing on shape-shifting COVID. In addition to posing a pronounced risk to unvaccinated human beings, COVID’s so-called Delta variant could derail the economic recovery and stock market rally. Below, I’ll show you how to add protection to your portfolio.
The microscopic villain…
Viruses tend to mutate and the coronavirus has been no exception. So far, four major coronavirus variants have been discovered in foreign countries and made their way to the U.S. The Alpha variant is the first and most common.
The World Health Organization has named each variant after a letter in the Greek alphabet, to make them simpler for public discussion. The newly emerged Delta variant is more transmissible, and more resistant to vaccines, than any other variant.
Delta isn’t just hyper-contagious; it also grows more rapidly in your body. First detected in India, the variant is clobbering the United Kingdom and spreading around the globe (see chart).
In the United States, the Delta strain is particularly dangerous in Southern states, where vaccination rates are comparatively low. Regional and state disparities in the public’s acceptance of vaccines are likely to eventually show up in economic statistics.
A turbulent week…
Worries about the COVID Delta variant tanked stocks Thursday, briefly superseding worries about inflation, but equities came roaring back Friday as investors again chose to focus on the “Goldilocks” pace of economic recovery.
Despite Thursday’s slump, stocks finished last week in positive territory, hitting new highs. Oil prices retreated and Treasury yields stabilized (see table).
We’re coming off a volatile week. Investors have alternately worried about inflation, the COVID pandemic, and mixed signals on the economy. Inflation fears have waxed and waned.
As I’ve repeatedly asserted in this column, we’re unlikely to experience the sort of hyper-inflation that I personally lived through in the 1970s. But rising inflation this year won’t simply go away, either.
Economic growth is strong, in the U.S and around the world. The global growth engine of China has lost a bit of momentum lately but it’s still on track, especially in the wake of last week’s announcement by Beijing to boost monetary stimulus. As of this writing Monday, Asian equities were surging.
The U.S. employment market continues to improve, although the rate of jobs growth has sputtered, as reflected by last week’s unexpected uptick in initial jobless claims. That said, U.S. gross domestic product growth has recouped pandemic losses in a remarkably short amount of time, with output during the first half of 2021 rising at the fastest pace in 80 years.
We’re currently witnessing a labor shortage, but I expect the jobs market to gain strength in the coming months. Summer travel, expiring extended unemployment benefits, the back-to-school season, and rising wages should help rectify employment imbalances.
The Federal Reserve contends that inflationary spikes are transitory. Proactive investors are clamoring for inflation hedges, but at the same time, they seem to agree with the Fed that inflation won’t reach runaway proportions. Real interest rates have declined.
Rising rates in Q1 2021 were the result of greater inflation fears and expectations that the Fed would “remove the punch bowl” sooner than expected. The more recent pullback in yields has resulted from concerns that the global economic recovery will be impeded by setbacks in fighting the pandemic. Rising cases of the Delta variant have contributed to the fall in rates.
Second-quarter corporate earnings season begins this week, and the results are expected to be strong. Wall Street has been waiting for a catalyst to trigger the market’s next upward leg and I suspect that we’ll get it this week, in the form of stellar corporate report cards. According to research firm FactSet, the consensus estimate is for year-over-year Q2 earnings growth to come in at more than 63%.
The upshot: The economy is improving and the bull market is intact. But as the emergence of the COVID Delta variant shows, we’re not out of the woods with the pandemic…not by a long shot. You need portfolio insurance.
A proven source of investment safety is gold. The rule of thumb is for a portfolio allocation of 5%-10% in either gold mining stocks, exchange-traded funds (ETFs), or the physical bullion itself. I prefer gold miners, which offer exponential gains because of corporate operating leverage. For details about our favorite gold mining stock, click here.