Stocks swooned on Monday as market participants speculated that the delta variant of the coronavirus could derail reopening demand and economic growth.
Roughly a year and a half into the pandemic, new strains remain major issues for the world at-large. Of course, there are other factors illustrating why stocks and other riskier assets (see Bitcoin and oil) are encountering rough spots in July.
“Equity markets have paused following an impressive run to record levels, as rebounding COVID-19 cases and rising tensions with China have replaced inflation as the primary caution of investors. Worries about peak economic and earnings growth is driving a move to defensive exposure. Other risk assets are seeing weakness, including commodity prices and Bitcoin,” notes Nationwide’s Mark Hackett.
Hackett brings up another important point investors should not overlook: declining bond yields. That means prices are going up, meaning some investors may be preparing for further downside in equities by ditching stocks in favor of safe bonds.
“Interest rates continue to reflect more uncertainty than equity levels, with the 10-year Treasury yield collapsing to 1.22% on Monday, the lowest level since February and more than 0.5% below the March high,” he said.
Increasing enthusiasm for bonds could also be the result of a recent spike in COVID-19 cases around the world.
“COVID-19 cases have rebounded in the U.S. this month, with the delta variant spreading in areas of low vaccinations, while some high-profile infections of vaccinated individuals. Cases rose by 70%, hospitalizations up 36% and deaths rose 26% in the most recent week, though numbers remain a fraction of the levels from January, with cases down 90% and deaths down 95% from the peak,” according to Hackett.
Those fears are reflected in a recent, dramatic decline in investor sentiment. Nevertheless, major domestic equity benchmarks remain within earshot of all-time highs.
More near-term volatility is a realistic possibility, but so is more upside for equities later this year.
“The S&P 500 does not reflect pressures underlying the equity and fixed income market and could be susceptible to near-term weakness. Elevated volatility could challenge resolve, but weakness is unlikely to be persistent beyond normal seasonality,” concludes Hackett.
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