Covid-19 cases quadrupled, prompting public health authorities to recommend that vaccinated people resume wearing masks indoors in high-risk areas. Yet, the Dow Jones industrial average closed at a record high five times this month and is up nearly 15 percent so far this year.
On Friday, the Dow lost more than 149 points to close at 34,935.47, less than 1 percent below its latest record, set four days earlier.
The market’s defiance of the delta variant reflects the power of the Federal Reserve’s near-zero interest rates, robust corporate earnings, and Americans’ ability to adapt to the pandemic. The specter of renewed business closures, disrupted school reopenings — and their implications for the labor market — and divisive fights over private-sector vaccination mandates are proving no match for the 16-month-old bull market.
“The spread of the delta variant is just not as significant as all the positives that are impacting markets right now, including incredibly accommodative monetary policy and effective vaccines,” said Kristina Hooper, chief global market strategist for Invesco. “It’s still a positive outlook. I don’t think much has changed because of the spread of the delta variant.”
Perhaps the biggest spur to stocks is the absence of any real alternative for most investors. The Fed’s decision to keep rates near zero since the start of the pandemic in March 2020 all but snuffed out returns on bonds, leaving stocks as the only game in town.
One measure of how unattractive bonds have become: globally, there are more than $16 trillion worth of assets offering a negative yield. An investor purchasing such a bond would actually lose money by holding it to maturity.
To fight the pandemic, the central bank also purchased more than $4 trillion worth of government and mortgage-backed securities. Flooding the economy with money indirectly lifted asset values at the same time.
Over the past year, the Dow jumped more than 32 percent, while the technology-rich Nasdaq gained 40 percent. The U.S. gains are part of a broader upswing that has nearly doubled global stock values to more than $115 trillion, according to data compiled by Bloomberg.
But stocks may have room to run, given the amount of cash that individuals and institutions still have in reserve. Americans have almost $4.5 trillion parked in risk-free money market mutual funds, more than twice the long-term average. Personal savings as a share of disposable income also are well above pre-pandemic norms.
“There’s not a lot of other places for people to go,” said Mike Lewis, head of U.S. equities cash trading for Barclays. “There is no alternative [to stocks] and there is a lot of cash.”
When the pandemic shaved roughly one-third off the Dow during three brutal weeks in March 2020, few people predicted the market was ready to take off. But after that astonishing collapse, stocks roared back to close out the shortest bear market in U.S. history, ending the year in positive territory.
The ascent continued this year, as the market braved drama over the Biden administration’s free-spending economic rescue, the fastest inflation in more than a decade, and the pandemic’s stubborn hold on American life. Investors piled into financial, technology and oil industry stocks, in particular.
Still, in recent weeks, as public and official concern about the delta variant percolated, investors grew skittish about industries that would be the first to suffer if renewed outbreaks cause consumers to hunker down. Over the past month, an index of five major airline stocks lost more than 5 percent, even as the broader market gained.
The spread of the highly infectious strain of the virus, which drove hospitalizations and deaths higher in states such as Florida, Missouri and Arkansas, coincided with the economy growing in the second quarter at an annual rate of 6.5 percent.
The fourth consecutive quarter of expansion meant impressive financial results for banks, manufacturers and consumer goods companies. Industrial giants’ second-quarter earnings are expected to rise by more than 382 percent compared with the same period last year, when the pandemic forced widespread closures, according to analysts for S&P Global.
On Thursday, automaker Ford reported an unexpected $511 million profit on revenue that topped analyst expectations. That came one day after Apple reported better-than-anticipated results.
“So far, the earnings season is going great,” said Liz Young, SoFi’s chief investment strategist. “So the market doesn’t have a huge reason to turn in the opposite direction.”
News of the bottom-line gains, which reflect what happened over the three months ended June 30, arrived as the outlook for the next few months was darkening.
The mutating virus prompted President Biden to maintain travel restrictions barring visitors from Europe, disappointing U.S. allies. Officials in Orange County, Fla., home to Walt Disney World, said they were in “crisis mode” as new cases of covid-19 reached levels seen during the worst days in 2020. And employers such as Google and The Washington Post began requiring their employees to get immunized.
Yet even an intense flare-up of the delta variant is unlikely to trigger the blanket restrictions on businesses that battered the economy last year, analysts said.
Americans might withdraw from face-to-face activities, such as dining out, and the scheduled fall reopening of schools could be interrupted in some communities, Fed Chair Jerome H. Powell said Wednesday.
But the pandemic has caused less economic disruption with each succeeding wave of infections, as Americans got vaccinated and learned how to work around the health risks. “It seems like we’ve learned to handle this,” Powell told reporters. “It doesn’t seem as though the effects will be very large.”
While the economy’s 6.5 percent second-quarter growth rate fell below expectations, the outlook for the remainder of the year remains solid. Business inventories are 10 percent below pre-pandemic levels, representing a $275 billion shortfall to be made up in coming quarters, Goldman Sachs economists wrote in a research note.
Automakers and retailers revving up production to restock depleted inventories should boost the economy’s annualized growth rate by 2.5 percentage points, Goldman said.
In recent earnings calls, major companies struck a tone of watchful optimism. Oil field services company Schlumberger told analysts last week it anticipates continued growth, despite the new coronavirus strain. United Airlines predicted “unabated” growth, noting that 84 percent of its Mileage Plus customers were fully vaccinated.
Gary Kelly, CEO of rival Southwest Air, echoed those sentiments.
“We are very well prepared to manage and muddle our way through if the delta variant affects our business.” he said. “And so far, we’re not detecting any impact at all.”
In the sometimes perverse logic of the financial markets, any larger-than-expected economic fallout from the delta variant could contain a silver lining. If renewed concern about the virus causes the economy to slow, the Fed would likely delay the monetary policy tightening that investment managers fear.
The Fed is waiting until it sees “substantial further progress” toward full employment and 2 percent-plus inflation before it begins reducing its monthly asset purchases, Powell said this week. That “tapering,” which would start a shift to a more challenging environment for investors who have grown accustomed to having a Fed backstop for their risk taking, is now expected early next year.
But Nancy Davis, founder of Quadratic Capital Management in Greenwich, Conn., said a deterioration in the pandemic could rewrite that schedule.
“If the delta variant becomes more of a risk,” she said, “that might just result in looser policy.”