Future Returns: U.S. Stocks Should Withstand Spread of Delta Coronavirus Variant

Future Returns: U.S. Stocks Should Withstand Spread of Delta Coronavirus Variant

The Delta coronavirus variant surging across the U.S. is putting everyone on alert, as cases rise in many cities and governments and businesses renew restrictions, like indoor mask wearing and proof of vaccination to enter certain venues or events. 

For investors, it’s only natural to worry that a market sell-off—like the market crash in the spring of 2020—might be looming.

Despite the accelerated spread of the Delta variant, the economic and market fallout from it will be limited, and U.S. stocks can grind higher, UBS Global Wealth Management predicts.

“While the Delta variant has the potential to spark renewed short-term volatility, we do not think it will pose a major threat to the bull market,” Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management said in a note last week.

On Wednesday, the Dow Jones Industrial Average gained 278 points or 0.8% to close at 35,116.40; while Nasdaq Composite rose more than 80 points to close at 14,761.30. 

Since the CDC announced in early July that the Delta variant became dominant, accounting for more than 51% of cases in the U.S., the Dow Jones Industrial Average has gained 1.56% in the month, and Nasdaq Composite has added 97.66 points, or 0.67% during the same period of time.  

Overall, UBS remains optimistic about the outlook for the economy and sees buying opportunities in cyclical sectors, Marcelli said. 

Vaccines Prove to Be Highly Effective, Lockdowns Are Unlikely

While the Delta variant is significantly more transmissible than the Alpha variant, the new virus has not caused a spike in hospitalizations and deaths, Marcelli says. 

According to the latest data available by the Centers for Disease Control and Prevention (CDC), there were 78,806 new cases across the U.S. on Monday, a significant drop from the recent peak of 105,347 cases reported on July 30. Daily new deaths dropped to 392 on Aug. 2 from last Friday’s 459 deaths. More than 99.99% of people fully vaccinated against Covid-19 have not had a breakthrough case resulting in hospitalization or death, according to the CDC. 

Also, preliminary data for multiple vaccines show promising signs that they have been holding up well against this new variant and still highly effective at protecting against severe disease. Pfizer and Moderna have been working on new vaccines to directly address the Delta variant with testing set to begin in August.

“Therefore, we don’t see any meaningful reimposition of restrictions or lockdowns,” Marcelli said in the note. 

Compared to European countries, the U.S. is likely a few weeks behind the infection curve. From a policy standpoint, the U.S. might follow the paths of these countries, which have continued with their reopening process, Marcelli said. 

New Variant’s Drag on Economic Growth Is Modest

As the lowest vaccination rates in the U.S. are concentrated in smaller states and more rural areas, including Idaho, Wyoming, Arkansas, Mississippi, Louisiana, Alabama, among others, the impact of new variants on the overall GDP should be modest and temporary, Marcelli said in the note.

“The new variant could cause some delays and curtailment in spending on services, but we don’t expect it to derail growth given more vaccines are now in the toolkit versus a year ago,” she said.

According to the UBS forecasts, the U.S. GDP should grow 6.9% in 2021, and 6% in 2022. The projected solid economic growth should “translate into very strong earnings growth for companies,” Marcelli said. 

During the second quarter, the GDP grew at an annual rate of 6.5%, slightly better than the 6.3% gain in the first quarter, the Bureau of Economic Analysis reported last Thursday. 

Weakness in Cyclical Sectors Creates Buying Opportunities

U.S. equity markets saw some weakness in the past couple of weeks as concerns about the Delta variant set in, and the strong second quarter earnings were overlooked, Marcelli said.

“Concern about the Delta variant has disproportionately weighed on cyclical sectors given their ties and higher sensitivity to economic growth,” she said. “We view the recent weakness as a buying opportunity as these sectors are still expected to see outsized earnings growth and valuation metrics remain attractive.”

These sectors include consumer discretionary (nonessential consumer goods and services), energy, financials, and industrials, which are positioned to benefit from pent-up consumer demand and a broader reopening of the economy, Marcelli said.

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