A likely summer of headlines about the COVID-19 Delta variant sets the stage for an ugly stock market in the near term, said Keith Lerner, chief markets strategist for Truist Advisory Services.
“Our view is that we are seeing another correction period within a bull market trend,” Lerner said in a note to clients after Monday’s brutal start to trading. “While the Delta variant complicates the short-term picture and is likely to lead to a continuation of sluggish trading through the seasonally slow summer months, our base case remains that the primary trend remains higher over the next 12 months.”
To be sure, Monday’s session was quite sloppy while investors reassessed their risk appetite with increasing COVID-19 infections worldwide at the hands of the Delta variant.
Investor concerns mounted that economies would have to close again due to the rising infection, or at the very least the recovery from the depths of the pandemic would stall once mobility restrictions are reintroduced.
The Nasdaq (^IXIC) and S&P 500 (^GSPC) recorded their largest declines in nearly two months. Meanwhile, the 10-year benchmark saw its largest drop in more than three months. The Dow Jones Industrial Average (^DJI) fell more than 900 points, marking its worst decline since October 2020.
The Dow Jones Transportation Index (^DJT) — which tracks the performance of economically sensitive names such as FedEx (FDX) — slipped deeper into correction territory (10% below its highs). The small-cap Russell 2000 Index (^RUT) continued its relative underperformance, falling more than 6% in the past month.
Even the often Teflon stock known as Apple (AAPL) lost 3%.
Some of the only winners in Monday’s defeat were the popular 2020 home trades – for example, Peloton (PTON) gained 8% and Etsy (ETSY) rose 3.5%.
While markets tried to recover some of the pre-market losses on Tuesday, nervous trading remains apparent.
“We are now also seeing some of the short-term complacency coming out of the market, with hedging (put-call ratios) reaching a multimonth high and the volatility index also hitting a multimonth high,” notes Lerner. .
Lerner adds, “The Delta variant is likely to slow down and complicate some of the margin reopening activities in the US, which will minimally skew economic growth in the third quarter, although we expect year-over-year growth to be within our reach. from 6.2% to 7.3% for 2021.”
For a market still trading at near-record valuations, it looks like more complacency needs to be whipped out of stocks in light of the virus resurgence. What we are talking about here is not a potential defeat in markets as seen at the peak of the pandemic in early 2020, but a reassessment of risk as investors realize that the pandemic is far from over.
Yahoo Finance’s Javier David contributed to this story.