There are plenty of red flags that ‘investors need to start thinking about risk reduction’, star money manager warns


“At this early stage of the spread of the delta variant and the slowdown in economic growth, there are plenty of red flags that prudent investors should start considering risk reduction.”


— Scott Minerd, CIO of Guggenheim Partners

Investors may be ignoring mounting evidence that the delta variant of COVID-19 could be trickier than financial markets currently have the credit for.

That is the current view of Scott Minerd, CIO of Guggenheim Investments, on the state of the US stock market as COVID cases rise in some US states, fueled by the highly transmissible delta strain of coronavirus.

In a research blog published on Friday, Minerd warns that according to recent research, the variant could be as contagious as chickenpox and other infectious diseases, causing a new set of disruptions for businesses, thwarting recovery from the global epidemic.

On Tuesday, the CDC revived its recommendation that Americans wear masks indoors in public places, even if they are vaccinated, in regions where the number of COVID cases is on the rise. Public health officials have said the delta variant of COVID in the nose and mouth is present at levels more than 1,000 times the original virus.

So even though vaccinated people are protected from the symptoms, they can still spread the delta variant, whose infectiousness is greater than the common cold, and comparable to the most communicable diseases such as chickenpox, epidemiologists have said.

Minerd, while acknowledging he’s not a medical expert in a CNBC interview, said he’s concerned the recent spike could see U.S. cases rise to levels not seen since last December in six to eight weeks. , around 200,000.

He called the current wave of the pandemic “mind-numbing” in the interview with the corporate television network.

“The increase in absolute cases on a weekly basis appears to be similar to what we saw last summer when COVID infections started to peak in the fall,” wrote the Guggenheim CIO in his blog.

He pointed to the “R” transmission rate of the delta variant. He notes that the transmission rate of the first strain of the coronavirus in early 2020 was “somewhere between two and three, meaning that if someone were exposed to the virus, they would infect two to three more people on average.”

Guggenheim

If an infectious disease’s R-rate is less than 1, the disease will “eventually die out,” but if it’s greater than 1, it will spread, he noted.

The R-rate of the delta variant is about six, “which is two to three times more transmissible than the initial COVID strain,” Minerd wrote.

Minerd speculated that the stock market could see a 10% or 20% correction as a result of the economic slowdown due to another delta-driven rise in the number of cases.

“The potential resurgence of the pandemic is happening during a seasonally weak period for risky assets. This increases the potential for downside risk,” he wrote.

As of Friday afternoon, the Dow Jones Industrial Average DJIA,
-0.45%
and S&P 500 index SPX,
-0.52%
were less than 1% from their July 26 highs, as the Nasdaq Composite Index COMP,
-0.72%
was just over 1% lower than the record earlier this week.

To be sure, a number of analysts view the market as richly valued and argue that the current loftiness could merit a pullback, especially if US companies have hit peak profits and the economy has seen peak growth in the wake of the pandemic.

Still, Minerd told the corporate network that a correction, while painful for investors, could present “a great buying opportunity.”

Against its downside backdrop, Minerd also sees the possibility that the benchmark 10-year Treasury rate TMUBMUSD10Y,
1,234%
could fall from 1.23% to about 0.65%, bringing the yield on government debt, which has priced everything from mortgages to auto loans, to its lowest level since October and September 2020.

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