Despite the DJIA suffering a one-day 2% drop on fears of the fast-spreading Delta variant of COVID-19, the DJIA, S&P 500, and NASDAQ indices all hit record highs last week. The US economy has now surpassed its pre-pandemic levels (as measured by GDP), consumer spending continues to rise, overall incomes are higher, and the core Personal Consumption Expenditures (PCE) price index — a key measure of inflation — showed a slowing in price increases. Things are looking up … so what could derail this positive momentum?
Delta.
While alpha, beta, delta, and other Greek letters connote a certain meaning in investing, the issue at hand isn’t that delta, but the other Delta: the highly contagious coronavirus variant threatening both public health and our economic recovery.
The Deets on Delta
The term “Delta variant” refers to a strain of the COVID-19 virus. It was first identified in India in December, then spread to Great Britain and is now prevalent in more than 124 countries, including the US. It is the most contagious version of the virus identified so far, and it’s even more transmissible than other viruses that cause common colds and seasonal flus. Anyone, including those who are vaccinated, can get it and spread it; these cases are commonly referred to as “breakthrough” cases. While worrisome, it’s not all doom and gloom.
Vaccines are highly effective against the Delta variant in preventing serious symptoms, including those leading to hospitalization and death. While no vaccine provides 100% protection against infection, breakthrough cases are still rare: The CDC estimates that only 0.098% of fully vaccinated people experience breakthrough cases with symptoms. (Compare that with the 5– 20% of Americans who get the flu each year.)
How will the Delta variant impact the economy?
Besides its health impact, the biggest concern with the Delta variant is whether it will slow the momentum of the economic recovery. Consumers who were just starting to feel more comfortable shopping at stores, traveling, and eating out may pull back and retreat into their homes. Workers who have been called back to the office may not feel safe, and those without jobs might not be eager to re-enter the workforce, which could impact employers and local businesses. And governments may reimpose lockdowns, mask mandates, and restrictions on businesses and public activities. The spread of the Delta variant around the globe may also impact an already constrained supply chain.
Any of these factors may add drag to the economy, but so far, economists are not expecting the Delta variant to derail it completely. While still early days, the data on sectors like consumer spending and travel still support a robust recovery. Strategists believe that the high vaccination rate in the US will help mitigate the virus’s impact on the economy. Consumers, particularly those who are vaccinated, will likely continue to spend as the economy reopens further. Americans have also learned to adapt and adjust to life with Covid. Having to wear masks more often isn’t appealing, but by now many have accepted masks as a likely part of daily life for the foreseeable future.
Our best bet in trying to predict the impact of the Delta variant is to look at what’s happening in Great Britain, where a significant wave of Delta variant infections swept the country last month. Today, cases in the UK are rapidly decreasing, giving hope that the US may see a similar decline in the next few weeks. Scientists are unsure of the exact reasons for the drastic turnaround, but speculate that the UK’s high vaccination rate may be a contributor. That’s potentially good news for America and other countries with high vaccination rates where Delta variant cases are on the rise.
How should I be investing?
The market volatility in July felt like a bit of déjà vu — a reminder of the Covid-news-induced market swings of 2020. But that volatility will likely continue for as long as the coronavirus and its variants linger. We can’t predict the future path of the virus, the economy, or the market. But we do know that overreacting to news, uncertainty, and volatility has never been a smart long-term investment strategy.
If the economic recovery is slowed by the Delta variant, cyclical stocks that started to enjoy a rebound may suffer, while technology and other stocks that performed well in 2020 may get a boost — and vice versa, if the Delta variant subsides as quickly as it peaked and the economy continues to reopen. A well-diversified portfolio with investments that are resilient through all kinds of market environments helps ensure that the investments you do hold can perform in either scenario, keeping you calm and keeping your portfolio on track.
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