Well, this was always the wild card and now it is here. Despite the availability of vaccine resources, enough Americans have refused shots and a new highly infectious variant has swiftly gained ground. The reflation/growth story, already bedeviled by supply shocks, could struggle for the rest of this summer.
When I first wrote about the vaccine hesitancy problem in April, the polls showed that only about 47% of Americans were really committed to being vaccinated. Another 20% or so were in the “maybe” camp. At that time my view was that the summer would see yet another struggle with the coronavirus. If anything, that has turned out to be optimistic. We now have Delta, 50% more transmissible than the previously dominant alpha variant.
Meanwhile, vaccine administration has slowed to a crawl in the US. We did not even hit the 50% mark yet (see chart above). It sure looks like most of the “maybes” are going to stay unvaccinated.
As per the latest data, Delta is about 50% of US cases. We should expect that within a couple of weeks Delta would be close to 100% of US cases. We are not alone in this of course. Delta prevalence is rising all over the world:
It is beyond doubt now that we will see rising cases, hospitalizations and deaths in the remaining part of the summer. UK, Portugal, Spain and Australia are already there and we are following:
The reproductive number for covid in the US pushed above 1 a couple of weeks ago which implies an expanding outbreak. We can expect it to move up further as Delta dominates. How many new cases this will result in is an open question, but Trevor Bedford of Hutch Labs recently estimated that we could see about 10 million or so official cases and perhaps another 20-30 million unreported ones. Based on that, I estimate about 50,000 more fatalities. (Obviously I would love to be wrong on this).
The question for investors though is will the Delta wave have a material impact on markets and the economy?
There are a number of well regarded analysts who say that Delta is not a big risk for the US economy. Their argument rests on two points: (a) there is no more appetite for lockdowns given the elderly population is over 85% vaccinated and (b) for those at low risk it is a matter of personal choice whether they would like to have the full covid-19 experience or just a couple of jabs at the local CVS. Business will continue as usual either way.
I have my doubts obviously as readers who have been following this blog may have noted. My counterargument is that the way a population reacts to covid is only loosely correlated to official lockdowns. So, even without a government mandate, people will voluntarily reduce their activities if they see a rise in cases or deaths in the country. This may be doubly true of urban areas which are simultaneously centers of economic activity as well as higher levels of covid consciousness.
Anecdotally for example, I see that a good majority of people have continued to wear masks indoors in the heavily vaccinated Manhattan and New Jersey neighborhoods that I frequent. This is despite the CDC’s current mantra that vaccinated people do not need to mask indoors. Then why is masking still so common? Ans. risk aversion. While vaccines are highly effective, “highly” does not equal “perfect”. People prefer to hedge their bets.
A mask is an (imperfect) coronavirus put option. I expect people to “buy” more such puts as the Delta variant takes hold and comes to dominate the media airwaves. Some of these puts will be in the form of cancelled or “never made” plans such as travel, eating out and so on.
Yet more puts will become apparent in the form of reduced labor supply as those already hesitant to attend physical work locations (or use child daycare) are further put off by a Delta wave.
Market action so far is more in line with my thinking. Covid-sensitive stocks have been on a downtrend in recent weeks (chart below).
Stay-at-home businesses like Zoom, Roku are up double digits in the last few weeks while airlines, hotels, cruises, car rentals etc are down by about the same. So far restaurants and retail are not so impacted but perhaps that is just a matter of time.
What, if any, is the silver lining?
First, allow me to say that you should go get your Pfizer or Moderna shots and disregard the CDC’s no-mask advice when indoors. You need to be alive to have a silver lining.
OK, having said that, many investors missed out on the great reflation trade in cyclical stocks and commodities in the first half of this year. If the Delta wave leads to more market volatility, discounts may again appear and in fact (as the chart above shows) are already appearing. Since markets tend to be ahead of the game, by the time Delta is well and truly raging in the US, travel stocks may already have bottomed and could even be back on their way up. With a 2 year or greater horizon, and the ability to stomach near-term losses, one could see this as an opportunity to buy the dips and gradually accumulate positions.
For those who want to reduce the upcoming turbulence, without explicitly buying protection, a barbell approach with a mix of travel stocks and technology stay-at-homes could turn out useful.
Volatility bets sound like a very interesting place to be in the next month or two. I was advocating on twitter a few days ago that the VIX is cheap at 15. Today it is up already to 20. Thus opportunities to buy protection bear watching.
My instrument of choice is the VIX futures curve, but I know not everybody is a fan. For me, one Delta is more than enough. I’d rather stay away from the rest of the Greek alphabet.
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