STOCKS OVERCOME DELTA VARIANT JITTERS

Stocks opened a bit higher this morning after retreating yesterday. At the moment, the Dow is up 65 points and the S&P 500 is up .3%. While valuations in some sectors & industry groups look full, it feels like investors are eager to buy any dip. Corrections, though relatively minor, continue to roll through the market. The energy sector is down 3.5% month-to-date after a monster 45% rally. Banks are down about 8% after climbing nearly 38% during the first five months of the year. On the other hand, technology, which already corrected twice from February to May, is on the ascent again. The VIX fear gauge is hovering around 16.5, which is fairly benign. Commodities—led by oil—are correcting this month following a strong post-Covid recovery. The bond market is catching a bid, pushing yields lower. One would expect that with inflation rising, bond yields would continue to march higher. That is not, however, the case. The 10-year Treasury Note yield, a benchmark for bond traders as well as lending rates, is down to 1.31% from 1.74% just three months ago. Clearly one big reason for this is unprecedented monetary stimulus from the Fed, which tends to keep rates low. Investors apparently believe Fed stimulus will continue, and inflation won’t be sustainably high enough to force an abrupt end to that policy.

Initial applications for unemployment insurance have fallen to an average weekly rate of about 350,000. And that rate is widely considered normal during periods of strong economic growth. Bloomberg economists predict that as “eligibility for benefits gradually expires, more unemployed Americans should rejoin the labor force…” About half of US states are ending federal benefits sooner than the official September expiration, with the goal of encouraging people to pick among the 9 million open job positions in the country.

According to the CDC, about half of new Covid-19 cases in the US are from the Delta variant. And while currently deployed vaccines provide some level of protection, exactly how much is a big question mark. Moderna (MRNA) announced it is working on a new mRNA vaccine that should effectively address variants. The drug is currently begin evaluated in human trials against four flu strains. About 48% of Americans are now fully vaccinated and another 8% are partially vaccinated. Protection afforded by vaccines has dropped the daily new case load to just 13,000. The hospitalization rate has fallen to just 1.2 per 100,000 people. Nonetheless, uncertainty surrounding the Delta variant is hitting some re-opening stocks hard. For example, airlines are down 10% to 15% since the beginning of June.