We’re all familiar with the phrase “the money has to go somewhere,” and this past week, safer havens in bonds and equity sectors were on the receiving end of fast changing fund flows. Treasuries, corporate bonds, preferred stocks, real estate investment trusts (REITs), utilities and consumer staples shined, while the most leveraged reflation sectors were a source of funds.
The heightened uncertainty surrounding the spread of the Delta variant of COVID-19 and a broader acceptance that the economy will cool down more than was previously forecast has changed the discourse of the market’s composition. Travel/entertainment, stocks, energy stocks and all things infrastructure-related are getting sold off aggressively.
The 22 senators (11 Republicans, 11 Democrats) that make up the bipartisan committee to produce a passable infrastructure package are continuing to wrangle over how to pay for the $579 billion plan that is wholly separate from the latest $3.5 trillion budget plan that will be supposedly paid for by taxes on corporations and wealthy Americans.
Again, not knowing how the future of taxes on corporations is going to play out is being used as a reason to sit tight in non-cyclical assets. The price action of the tape is calling into question the harmony of the Fed’s dovish policy, stimulus spending, falling commodity prices and the vibrant economic data surrounding the housing markets, retail sales and upbeat labor figures for June.
A rolling correction of sorts has swept through financials, materials, industrials, transportation and high-beta growth. It then hit the prized semiconductor sector on Friday. Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Netflix (NASDAQ: NFLX) and Google (NASDAQ: GOOG), plus Microsoft Inc. (NASDAQ: MSFT) and Tesla Inc. (NASDAQ: TSLA), which, when combined, make up roughly 27% of the S&P 500’s total assets, have maintained most of their gains. As a result, these stocks are keeping the benchmark index above its 20-day moving average. As seen on the chart below, the first line of technical support is right at 4,300.
In all actuality, here’s the good news: If the rolling correction runs its course by the end of this week, the market will be well set up to trade higher into what is the heart of earnings season.
Usually, the best-of-breed stocks run up hard right into the release of their quarterly sales and earnings. This time around, the current selling pressure could result in investors buying on the news, depending on the extent of the separate pull backs in the stocks that are leading the primary bull trend.
Still, the big fly in the market’s ointment is inflicting a new-found fear that may undercut all the economic progress that is being made. Investors need to get an understanding of the Delta COVID-19 threat more so than trying to figure out how spending or taxing on Capitol Hill will play out.
At least that’s how I’m seeing it. The market got really narrow, really fast heading into this past weekend. Some of this sharply negative price action can be accounted for by seasonality, where lighter volume can push down stocks more intensely. However, there was a clear flight to safety based on the “God forbid we have to go through the whole pandemic thing again.”
It started with banning spectators at the Tokyo Olympics, which sent bond yields plummeting. After steadily falling for six months, the Coronavirus caseload related to the Delta variant is rising sharply. On Friday, the Centers for Disease Control and Prevention reported that the number of new cases is up by nearly 70% in just a week. The number of hospitalizations is also up by nearly 36%. As a result, reality set in that the many months of progress that were achieved against COVID-19 are starting to reverse.
As NPR has reported, the Delta variant appears to be about 225% more transmissible than the original SARS-CoV-2 strain. A study from the United Kingdom found that the Pfizer vaccine is 96% effective against hospitalization from the Delta variant after two doses. So, even though it’s still possible to get infected, the vaccines dramatically reduce the risk of a serious illness that could lead to hospitalization or death.
Disseminating this message to the public is crucial. Once market participants get a handle on the breadth and scope of this latest viral outbreak, the current phase of consolidation should give way to fresh buying momentum in many of the now beaten-down sectors that were so popular heading into July. These are fast market conditions, as stock picking is at major premium and negative headlines that once had been brushed off are now triggering widespread selling pressure.
Fear of the unknown always outweighs other market forces, and right now, investors are dealing with dueling narratives about inflation from the transitory Fed and inflation hawks like BlackRock’s Larry Fink and Bridgewater Capital’s Ray Dalio believe that the services component of the recent inflation data is structural. To this end, the Fed has some work to do to convince the market that its members are seeing the economic conditions for what they are and not merely what they desire.