The COVID-Defying Bull Market, Explained
If the coronavirus Delta variant is so deadly, why does the stock market keep hitting new highs? That’s what some of my readers have been nervously asking me, as they ponder whether to cash out.
For insights, let’s turn to Gordon Gekko. As the fictional financial wheeler-dealer in the 1987 movie Wall Street, Gekko is the villain. But as memorably played by Michael Douglas, the character is a charming rogue who imparts some timeless investment wisdom. As Gekko puts it: “First lesson in business is: Don’t get emotional about stock; clouds your judgement.”
So let’s look at COVID Delta, without emotion.
The coldly rational traders in lower Manhattan have decided that, although regrettable, rising COVID Delta casualties in certain “hot spots” of the country won’t derail the economic recovery.
Several state and local leaders announced in recent days that they have no intention of reimposing lockdowns and quarantines. In some cases, their attitude has been downright defiant. Does that make sense from the standpoint of public safety? That’s open for debate. But the upshot is, businesses aren’t likely to get shuttered again.
What’s more, booming national economies in other parts of the world, notably Asia, have gotten a handle on the virus, due to widespread vaccination rates, routine mask-wearing, and strict health mandates.
It’s also worth noting that during the worst of the pandemic in 2020, the economy restructured, with a greater emphasis on online shopping, home delivery, remote work, and stay-at-home leisure activities. This new way of life has become entrenched, which is a major reason why technology stocks have surged.
Don’t just take my word for it. Here’s what the analysts at Goldman Sachs (NYSE: GS) recently had to say about COVID Delta’s likely impact on the economy:
“We think the near-term economic impact of a virus resurgence in the U.S. would be modest…Widespread vaccination provides protection against severe infections, and the elderly populations most at risk of severe infection have high vaccination rates even in states with low overall vaccinations, making renewed policy restrictions less likely…surveys suggest that U.S. consumers have not meaningfully increased their avoidance of riskier activities. High-frequency measures of consumer spending and restaurant bookings in the U.S. have responded very little to new virus cases and deaths at the county and city level.”
Accordingly, analysts haven’t altered their projections for strong economic growth this year, despite the outbreak of COVID Delta. The Bureau of Economic Analysis (BEA) currently expects U.S. gross domestic product growth (GDP) of between 6% and 7% for 2021 (see chart).
What’s more, during second-quarter earnings season, we’re seeing robust profit growth, with companies routinely beating expectations that were high to begin with.
The operating results to watch in the coming days will be Big Tech, which serves as an economic bellwether. That’s where the expectations game will truly come into play.
Sometimes on Wall Street, good isn’t good enough and even a positive earnings report can get punished if it doesn’t meet Pollyannish expectations. If a big-name Silicon Valley player gets punished, it could create a temporary downdraft for the rest of the market. But so far, the stock market appears un-stop-a-bull.
To be sure, last Monday witnessed a stock market swoon, with a 700-point plunge in the Dow Jones Industrial Average. If you had your television turned to CNBC during the financial rout, you were subjected to red “Sell Off” headlines, furrowed brows, and breathless chatter.
The panic lasted a single day.
By the closing bell Tuesday, the stock market had recouped most of its losses. Stocks were soon back to their all-time highs.
Last week, COVID Delta dominated the news. And yet, U.S. equities rallied for the fourth consecutive day on Friday and finished the week higher, with the Dow closing above 35,000 for the first time (see chart).
As long as the Federal Reserve continues to ensure massive liquidity, further stock gains lay ahead. Every bull market takes occasional breathers and we’re likely to see additional pullbacks this year. But I don’t foresee a crash.
The real danger to the rally will emerge when the Fed starts to taper its purchase of assets with long-term maturities. That won’t occur before 2023.
Projections of roughly 7% U.S. GDP growth for 2021 might represent the strongest period of the pandemic-era expansion, with growth waning in 2022 and beyond. However, if you examine the past three expansions, the year of “peak growth” experienced an average stock market return of 11%.
One cause for concern is bad breadth. I’m not referring to halitosis, but to the trend of gains getting more concentrated among a smaller number of market leaders. The mega-cap FAANG stocks have resumed their torrid pace, lifting the overall S&P 500 index.
The week ahead will be busy with operating results from the technology sector’s big guns.
Alphabet (NSDQ: GOOGL) and Apple (NSDQ: AAPL) report on Tuesday, Facebook (NSDQ: FB) on Wednesday, and Amazon (NSDQ: AMZN) on Thursday. All four are scheduled to report after the closing bell.
If forthcoming quarterly earnings from any of these mega-cap tech stocks disappoint, their share prices could take a hit and trigger another broad market pullback. Over the long haul, though, I expect the market rally to continue, with small-caps and cyclical plays in the lead.
Let me be clear: From the standpoint of my personal health, I take the pandemic very seriously, and so should you. I urge you to take precautions to protect the safety of you and your loved ones. But I also urge you to stay invested.
It’s okay to get emotional about your wife and kids, but (as Gekko advises), not the stock market.
Editor’s Note: Underlying conditions remain bullish for stocks. However, if you’re looking to mitigate risk, consider high-quality dividend stocks.
Dividend-payers are time-proven vehicles for long-term wealth building, but they’re also safe havens because companies with robust dividends boast the strongest fundamentals. For our list of the best high-yielders, click here.
John Persinos is the editorial director of Investing Daily. Send your questions or comments to email@example.com. To subscribe to his video channel, follow this link.