The major indices, the TSX, NASDAQ, and S&P 500 are trading near record levels, and while investors remain bullish, they shouldn’t get complacent. As we have seen recently, it doesn’t take much to spook the stock market, nor does it take much for investor sentiment to shift.
And there are more than enough economic indicators that suggest the strength of the global recovery isn’t as robust as we think.
How Is the Delta Variant Affecting the Economy?
Case in point, the stock market rallied in the first half of 2021 as investors hedged their bets that the global economy would bounce back from the coronavirus. That initial data backs that up, which explains why the S&P 500 hit 39 record closes this year.
But on Monday, July 19, stocks, bonds, and oil prices took a big hit. The TSX tumbled close to 3% and the Dow Jones Industrial Average fell 2.1%, marking the steepest one-day decline since October.
Meanwhile, the yield on the 10-year U.S. Treasury note, which goes in the opposite direction of bond prices, fell to its lowest level since February. U.S. crude oil prices cratered 7.5%, marking their worst one-day session since September.
Companies whose future growth are tethered to the economic recovery, including cruise ships, airlines, hotels, and casinos, saw their share prices take some of the biggest hits. Energy stocks also took a beating.
Behind the rout are some red flags about the economic recovery. The biggest is the emergence of the highly contagious Delta variant, which has spread rapidly around the world, and now accounts for the vast majority of new COVID-19 cases in Canada and the U.S.
As we have reported previously, Canadian and U.S. inflation is accelerating faster than expected and delays in the supply chain, including manufacturing and shipping delays, are also gripping the economy.
U.S. jobless claims surprised to the upside, totaling 419,000, for by July 17, well above the 350,000 estimate. This represents the highest weekly jobless count since May 15 and comes a week after U.S. jobless numbers hit a pandemic low.
While the stock market has since rebounded (but not fully recovered), nervous analysts are questioning whether we are going to see a slowdown in the global economic recovery, or worse, if governments will need to resume lockdowns to contain the Delta variant.
These uncertainties could be a drag on equities over the coming weeks.
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