A resurgence of Covid cases should not harm the economy because of the effectiveness of vaccines, continued low death rates and the unwillingness of numerous countries to lock down, according to Schwab Chief Global Investment Strategist Jeffrey Kleintop.
Kleintop’s comments at the “Schwab Market Talk” for advisors yesterday came as fears that the Delta variant, a highly contagious Covid mutation that has become the dominant strain of the virus, will cause the type of massive lockdowns that Covid triggered a year and a half ago.
“The spread of the Delta variant and it’s potential to cause an economic slowdown is quickly becoming one of the biggest issues facing investors,” Kleintop said during the seminar.
The World Health Organization have warned that public restrictions on activities, mask wearing, social distancing and maybe even closing some businesses may make a return this fall if the Delta variant continues to spread.
Authorities in Australia, South Africa and parts of Asia have recently reintroduced measures to curb the virus spread. France just warned its citizens about going on vacation, while Japan declared a state of emergency in Tokyo and plans to ban spectators at the Summer Olympics.
“In the near term, the news is probably not going to get any better as the variant spreads," Kleintop said. "We know the fall and winter months may increase the spread of the Delta variant, mirroring the usual seasonal virus pattern. Now the WHO has issued cautions on reopenings and that has raised risks to growth.”
But importantly, he added, vaccines are proving effective against the more severe effects of the Delta variant. “I give you an example in the U.K. Despite a big rise in new cases thanks to the Delta variant, we have not seen a rise in deaths. A huge ramp up in the number of cases and nothing at all in numbers of deaths. I think there were 15 or 20 deaths.
“That’s not nothing, of course. It’s a huge human toll. ... [But] we’re just not seeing high death rates, likely due to the high vaccination rates in the U.S.,” Kleintop said.
With fewer hospitalizaitions and deaths, there may not be a need for renewed lockdowns, he said.
“We’ve seen in Israel, with their Health Ministry using real world health data on the Delta Variant, that the Pfizer vaccine was 93% effective in preventing severe illness during an outbreak. The vaccine rollouts show no signs of slowing down in Asia. They’re making steady progress in Europe and the U.K. They tapered a bit in the U.S. and the U.K., but only after reaching 50% of the population,” Kleintop said.
The outbreaks may even encourage more people to get vaccines, he added.
“With the potential political resistance to new lockdowns and the effectiveness of vaccines against the Delta variant, broad lockdowns may not be necessary and economic growth will hopefully remain solid,” Kleintrop said.
That does not mean there will be an impact on the stock market. “With the resurgence of the virus building over the past months, the affects are reflected in market performance,” he said. “Since early June, we’ve seen cyclical stocks lag defensive stocks, reversing their leadership since the beginning of 2021.”
Leading on the downside have been stocks that had been benefiting from economic reopening, including travel, retail and leisure stocks. “Those that would suffer the most from a delayed reopening [have been hit], so markets are really considering this,” Kleintop said.
The global economy and corporate earnings look strong, he said. “They’ve even prompted the Fed to think about thinking about tapering stimulus in the U.S.,” he said.