The highly transmissible Delta variant of Covid-19 now makes up an overwhelming majority of the new cases in the U.S., bringing with it a rise in cases and hospitalizations. Widespread vaccine distribution and distancing measures have helped limit the variant’s impact, but we could still see some drag on economic growth as some restrictions are reintroduced and consumers potentially become more cautious. While we may see an increase in market volatility due to the Delta variant, we believe the S&P 500 is still likely to see more gains through the end of the year.
The Delta Variant May Drag On Economic Growth
Despite the increased transmissibility of Delta and the increased health threat for those who aren’t vaccinated, our understanding of the measures needed to contain Covid-19 is in an entirely different place than it was in 2020. Above all else, we have not just one but several vaccines, which drastically reduces the risk from the variant, although it can’t completely eliminate it. We understand the effectiveness of masks in limiting transmission. Treatments have improved. We also know that the virus is not easily transmitted by touching surfaces—especially with simple good practices around hand washing—limiting the need for certain restrictions. Because of that, deaths from Covid remain near the lowest level of the pandemic despite the pick-up in cases [Figure 1]. Much of that is due to the vaccines’ ability to limit serious cases, though health risks remain high for those who aren’t vaccinated. We are also seeing some strain on health-care systems in regions with low vaccination rates.
Our view has consistently been that governments should, and generally will, impose restrictions only to the degree necessary to protect the most vulnerable and keep our health-care system from getting overwhelmed. There’s not a clean, scientific answer to exactly what that point is, but there is a solid set of guidelines. If individuals, businesses and officials use those guidelines as appropriate for their communities, there will still likely be some added drag on economic growth—but we think it will be manageable, with the drag still outweighed by the on-going rebound.
How much added drag? The most recent gross domestic product (GDP) reading for the U.S. put economic activity back above the level where it was before the pandemic. That does raise the bar. We do think third-quarter GDP forecasts could fall a few percentage points, the lost growth being pushed back into late 2021 and early 2022. But even if the impact was so strong that we saw modest economic contraction, which we view as unlikely, we would expect the economy to bounce back quickly.
New Restrictions, Supply Chains Sources Of Concern
Any drag on economic growth would likely come from a few key sources:
While we are unlikely to see a new wave of widespread shutdowns in the U.S., there may be added restrictions. The effectiveness of vaccines and our increased understanding of how to contain Covid will limit the need for restrictions, especially with vaccination rates rising again and vaccines available to anyone eligible who wants them. The strongest measures will probably be around mask mandates and social distancing, with stronger restrictions confined to localities where they are most needed.
Even without government mandates, there will still be changes in individual behavior that may slow the rate of economic growth. Changes in individual behavior due to safety concerns will probably have a larger impact than government intervention. This will likely be especially true for those with young children who are not eligible for vaccinations and those who choose not to get vaccinated. Behavioral changes may slow the recovery in the job market in particular if the changing environment places additional childcare demands on parents or raises workplace safety concerns.
We are likely to see an extension of supply chain disruptions. While the impact from Delta could slow demand growth, it may have a bigger impact on the supply side. Some countries where vaccine availability has been low have already imposed added restrictions, which could limit factory activity, exacerbate shortages and create added price pressures. The economy has been slowly starting to work its way through supply/demand imbalances, but this may negate some of the progress, putting a temporary cap on growth.
Market-Positive Elements Of Response May Gain Traction
Not all the news around the Delta variant has been bad from a market perspective. We may even be close to the inflection point where much of the bad news has been priced in and markets start looking past the Delta variant’s growth impact. Markets tend to lead the economy, not the other way around. Think about where we were on March 23, 2020, when the S&P 500 bottomed. Granted, we are in a very different place right now, as we have not seen a substantial Delta-related pullback yet, only rotation toward some less risky areas of the market, so there may still be bumps ahead. But we think any dips in stock prices are likely to be short-lived and it may not even take all that much clarity before we see some rotation back to the market sectors that would benefit most from reopening.