The Delta variant is not a threat:
- Texas, Florida, Missouri and Arkansas account for 60% of new cases. These states will not shut down. They will let the delta variant run wild. Those governors do not care. It won’t affect business, unless businesses voluntarily choose to close. In some cases, it may motivate more people to get the vaccine. The vaccination rate is much higher in the NE, West Coast and in major cities. The delta variant will have less impact on these areas than it will in rural areas.
- Vaccinated people who get the variant don’t end up going to the hospital or die at the same rates as those without the vaccine. Vaccinated people are getting minor symptoms. Almost all hospitalizations and deaths are coming from unvaccinated.
- The CDC believes that 4.6 times as many people have had the virus and not tested for it than have tested for it. This means presumably that these people who had the virus and didn’t get tested were not sick enough to get tested. JPMorgan thinks that about 70-75% of people have either had the virus or had the vaccine or both. So while it is a little surprising that the Delta variant is picking up steam, it probably will begin to peak much sooner than pervious waves simply because more people have been exposed to the virus than with previous waves.
- Hospital workers are vaccinated at a higher rate than the public. One of the biggest reasons for the shutdowns was to protect our front line health care workers. This can no longer be used as an excuse.
- The public will not stand for another round of shutdowns. It’s not our fault some people don’t want to get vaccinated.
Fundamentals and valuation:
- Markets are not good at self correcting based on valuation alone. Markets use data points to determine valuation and most data points coming in now suggest a continued bull market. Strong earnings, favorable monetary policy, continued QE until at least the beginning or middle of 2022, few competing alternative investments, clear evidence of transitory inflation, and a rebounding economy that will not shut down all suggest this bull market will continue to go higher. While there may be some profit taking and rebalancing that could lead to a minor correction of 5-10%, the markets will probably re-inflate to the same or higher levels unless there is new data points that suggest the fundamentals are becoming negative.
- We are in an upside down market: any bad news is actually good news. This is because any variant threats actually lower the Fed’s desire to begin tapering. The longer the Fed runs its QE program, the higher stocks will go.
- A major sell-off this close to the last is really unprecedented. There is actually more precedent that stocks will become extremely overvalued than there is precedent that there will be another sell-off this close to the last.
- Major market sell-offs almost always precede or coincide with a recession. Right now, there is not any evidence to suggest another recession is around the corner. And if there was, the Fed and the democratically controlled government would step up with more QE and another round of fiscal stimulus which would drive equity markets higher.
- How much higher can the market go? The S&P 500 is trading at a forward PE ratio of about 21.5x. Prior to the pandemic, it was trading at close to 18.7x. It’s about 15% higher. I think that is easily justifiable based on the more favorable monetary climate alone. For comparison, the CRB commodities index is about 20-25% higher than pre-pandemic. Historically, investors have been willing to pay as much as 25x forward earnings for the S&P 500. So it’s possible the market may test that level in the near future, so that would be a 16% run-up in prices. This compares very favorably to the downside risk, which I believe is probably somewhere near 5-10%, which are historically normal amounts for the market corrections. And remember, timing the market underperforms time in the markets, so most of the time, it’s better to hold than sell.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.
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