Investors turned defensive on Monday, with stocks down, bond prices up and commodities trading as if another Covid-induced recession was imminent.
While fears of the Delta variant of Covid-19 fueled Monday’s sell-off, they also provided an opportunity for markets to let off some steam after a long rally without correction. Today’s sell-off could open up buying opportunities for investors willing to assuage those concerns and pick up some suddenly discounted names.
Shares of more cyclical and economically exposed companies took the brunt of the declines on Monday. Around noon the
Dow Jones Industrial Average
fell by about 870 points, or 2.5%, while the
lost 1.9% and the technology-heavy
fell 1.2%. The yield on the 10-year US Treasury at one point fell below 1.2%, the lowest level since February.
The Delta variant, a more contagious mutation of the coronavirus, has quickly become the dominant strain in the US, responsible for most infections in recent weeks. The director of the Centers for Disease Control and Prevention, Dr. Rochelle Walensky, said Friday that the spread was concentrated in areas where vaccination rates were relatively low. Walensky added that while the number of new daily cases had risen by 70% in a week, hospitalizations and death rates rose at a slower rate.
A new wave of Covid-19 infections raises the specter of another wave of lockdowns and restrictions that would hinder the ongoing economic recovery. And with inflationary pressures firmly in place and commodity prices rising while supply chains struggle to keep up with demand, an ugly word comes to mind: stagflation, or rising inflation despite slow economic growth.
“The global economy is barely surviving on livelihoods, and another wave of infections could lead to lockdowns that could spell the death knell for the weak recovery,” said Peter Essele, chief investment manager for Commonwealth Financial Network, on Monday. “Fear of stagflation will be a major concern for investors as a resurgence in Covid infections causes economies to slow as consumer prices continue to track an upward trajectory.”
The bleak Covid news comes as market concerns had developed on several fronts. Highest inflation in years, uncertainty about an imminent shift in Federal Reserve policy and expensive valuations had already put equity investors on edge. Expectations are also high for the current earnings season for the second quarter.
Much of the good news was already priced into the market, with major indices hitting new highs last week. The S&P 500 is up 16% this year and hasn’t seen a drop of more than 5% since last fall, an environment ripe for some pullback in stock prices.
But that doesn’t mean it’s all doom and gloom for stock investors from here on out. Period corrections can be healthy for a bull market, as they bring valuations back under control and provide buying opportunities for newly discounted stocks.
“The [S&P 500] is under 20 days [moving average] this morning for the first time since mid-June, when a four-day pullback occurred,” Katie Stockton, founder and managing partner at Fairlead Strategies, focused on technical analysis, wrote on Monday. “Short-term momentum is now down, but we think the pullback will be equally short-lived.
Furthermore, Stockton noted that the S&P 500 found support Monday around the 50-day moving average of 4232. The index was standing at about 4240 after noon.
Concerns about new Covid-related lockdowns on the horizon may be overblown at this stage of the pandemic. It’s safe to say there’s little need for continued or re-imposed restrictions among Americans, and the Delta variant has not been shown to cause serious infections in vaccinated individuals, keeping mortality low.
“We expect reflation trading – cyclical stocks, bond yields, high beta stocks, reflation and reopening themes – to rebound soon as fears of Delta variants wane and inflation surprises persist, supported by above-trend growth, strong consumer fundamentals and a low earnings threshold” , wrote
Chief Global Markets strategist Marko Kolanovic on Monday.
In other words, buy the dip. A 2020-style Covid lockdown in the US shouldn’t top the list for investors who already have enough to worry about.
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