Pandemics don’t end just because we want them to.
Investors were reminded of that in a big way last Monday when the Dow plunged over 700 points.1 It’s the biggest single-day drop since October of last year. Unfortunately, the cause can be summed up in a single, all-too-familiar word: COVID. While the markets did recover much of their losses the next day, some of my clients have expressed concerns – concerns I want to address in this letter.
In this blog, I’ll explain why coronavirus fears may be temporarily upending the markets again. I’ll also explain why there’s still plenty of room for optimism.
The Delta Variant
As you probably know, a new variant of COVID – known as Delta – has been spreading like wildfire across the planet. It’s now the most dominant variant in the U.S.2 But after over a year of living with this virus, why are investors making such a big deal over this particular variant?
The answer is simple: Investors are afraid the Delta variant might stall the economic recovery. (Industries that were hit hardest by the virus and have benefited the most from reopening, like airlines and energy companies, experienced some of the biggest drops on Monday.)
The statistics surrounding Delta make it clear why investors are concerned. For example:
- The Delta variant is approximately 225% more contagious than the original COVID-19.3
- As of July 16, COVID cases in the U.S. are up 70%, with deaths up 26%.2
- Forty-eight states are experiencing a surge of 10% or higher compared to the previous week.1
- With over 50% of the U.S. population still unvaccinated, there’s plenty of room for the Delta variant to spread.4
The fear is that Delta may cause a prolonged surge in cases and hospitalizations. If that happens, fewer people may travel. Restaurants and other establishments might see a new decline. Businesses that only recently started hiring again might be forced into another round of layoffs. Our economic recovery has been impressive, but it’s also fragile. Nobody wants to see it derailed.
The Delta variant is also exacerbating an even older concern: inflation. Anyone who has gone to the grocery store or filled up at a gas station this year knows consumer prices have gone up. That’s because, thanks to the reopening, demand for consumer goods is far outpacing supply. As we know from the Law of Supply and Demand, when demand is greater than supply, prices increase. This creates inflation. Inflation, in turn, makes it harder for people to buy the goods and services they need. It also makes it harder for businesses to hire new workers.
The worry here is that the Delta variant will do the same thing the original virus did last year: interrupt global supply lines. That would cut supply even more, at the same time prices are already rising higher. This is called stagflation – an increase in inflation combined with a decrease in economic activity. To be clear, we’re a way off from that, but it’s always something economists keep an eye on.
So, that’s the story behind Monday’s market plunge. On the surface, it may appear to paint a grim picture. But, while it’s true that concern is warranted, there’s still plenty of reasons for investors to remain optimistic.
First, the vaccines are working. Even against the Delta variant! One study found the Pfizer vaccine to be “88% effective against symptomatic disease and 96 percent effective against hospitalization from Delta”.5 Other studies have found similar results for the Moderna vaccine. As more people get vaccinated, the less damage variants like Delta might do – to our population and our economy.
Second, it’s important for investors to remember that we’ve seen this story before. When COVID-19 first hit our shores, the markets took a major hit – before bouncing back even higher than before. As nasty as this pandemic has been, the markets have proven resilient time and time again. (And indeed, the Dow rose 550 points the very next day.)6
Third, the markets are still close to their all-time highs. Frankly, even if Monday’s drop is part of a larger trend, market corrections are inevitable, normal, and even advantageous.
So, what should we as investors do about all of this? The same thing we’ve been doing for months now: Be positive and prudent. I will continue monitoring your investments closely. We’ve factored coronavirus concerns into our long-term strategy, so at the moment, there’s no need for any drastic changes. We remain confident in the course we’ve set. Should that course ever require a correction, you’ll be the first to know. In the meantime, we should mentally prepare ourselves for more uncertainty in the weeks ahead as we learn more about the Delta variant.
My advice is to keep safe and enjoy this beautiful summer. I will focus on the markets so you don’t have to. After all, that’s why we’re here! Of course, if you ever have any questions or concerns, please don’t hesitate to let me know.
Have a great rest of the month!
P.S. I love what I do. I’m always ready to do more of it. If there’s someone you know who could use a second opinion on their investments, I’d love to hear about them.