The Delta Drop

Market Reaction: July 19, 2021

Key Thoughts

For the past year or so, the winds have largely been blowing in one direction with both U.S. gross domestic product (GDP) and the S&P 500 experiencing a sharp V-shaped recovery. However, some crosswinds seem to be forming with modestly slowing economic growth and the COVID Delta variant causing a retracement in the reopening trade.

Recent concerns seem focused on the Delta variant, but the 10-year U.S. Treasury yield has been in decline since peaking at 1.74% on March 31, 2021. There are a number of reasons for this: a broader acceptance that inflation may prove largely temporary, moderating economic data (the Atlanta Fed’s GDP tracker has come down from 10.5% in mid-June to about 7.5% currently), market technicals, and rising COVID cases among unvaccinated populations. With the real 10-year yield falling to minus 1.02%, this had led to a rotation back into technology and growth stocks with the S&P 500 Growth index up about 7.7% since the end of May. While some have questioned if this is the end of the reopening trade, we would point out that the S&P 500 Value index is down just 2.4% over the same time frame. This suggests that investors may be embracing familiar growth names as Delta fears rise, but the value trade has not been completely abandoned and likely has some further room to run with consensus earnings expectations likely to be revised higher.

Despite real world evidence that vaccines provide significant protection from the Delta variant, large swaths of the global population remain unvaccinated. According to Bloomberg, the least wealthy 50 countries have about 2% of the vaccinations, but almost 20% of the population. Those countries with the highest incomes are getting vaccinated more than 30 times faster than those with the lowest. Thus far, the Delta variant has not spread as rapidly in the U.S. as in the United Kingdom, but confirmed cases have climbed to about 32,000 a day over the last seven days – up from 11,000 cases a month ago. While trending in the wrong direction, this pace remains well below the 250,000 cases per day witnessed as recently as January 2021. We should also note that deaths are likely to be suppressed with over 77% of the U.S. population aged 75 years plus already fully vaccinated.

Overall, we expect the global economic growth scare to eventually abate as governments quicken the speed of their vaccination efforts to reach unvaccinated populations (including children), but markets may be more volatile for some time as investors reassess the outlook. Importantly, any noticeable slowing in growth would likely be backstopped by accommodative fiscal and monetary policy. We think this greatly lowers the odds of a bear market. For further insights, please see our CIO Strategy Bulletin: How to Manage Through a Longer End to the Pandemic.