Will Covid-19 Kill the Current Market Rally?

• Covid-19 Infections, Hospitalizations, & Deaths… All on the Rise
• President Orders Workers to Get Vaccinated or Face Weekly Virus Testing… But will the Mandate Survive the Courts?
• Major Airlines Concerned about another Pandemic Beating Down Their Future Bottom Lines
• Federal Reserve’s “Beige Book” Shows a Slowdown in U.S. Economic Activity
• Department of Labor Reported Job Openings Rose to 10.9 million

Covid concerns sent the major U.S. indexes retreating over the holiday-shortened week. The S&P 500 suffered through its worst week since February.
The Dow Jones Industrial Average shed 761 points to finish the week at 34,608, a decline of -2.2%. The technology-heavy Nasdaq Composite gave up 248 points to 15,115, a drop of -1.6%.
By market cap, the large-cap S&P 500 retreated -1.7%, while the mid-cap S&P 400 and Russell 2000 declined 2.7% and -2.8%, respectively.

The Federal Reserve released their latest “Beige Book”, a general economic report using data from all over the country.

The report showed (not that anyone will be surprised) that our economic activity over the summer slowed as the Delta variant took over the headlines. The hardest hit by the covid resurgence was tourism, including dining out and travel.

The anticipated resurgence in consumer spending, post-Labor Day, is certainly in question.

In jeopardy is also the expected increase in general economic activity, leading to increases in corporate earnings in the fourth quarter.

Slowing economic data combined with missed corporate earnings may be a catalyst for a choppy few months in the stock market or worse, a sell-off that we have not seen in a while.

The S&P 500 has gone over 215 trading days without a 5% or better pullback, the longest such streak since 2016.

Economists and analysts are downgrading their economic forecasts for the fourth quarter.

Some forecasters believe the high for the stock market is already in for 2021.

In contrast, many corporations in their third-quarter earnings calls raised guidance for fourth-quarter earnings. Both predictions cannot come true. We will not know who is right until the actual numbers are released.

Earnings season starts again in October.

Until then, we are stuck with general economic data and conjecture over the hard data released through company earnings reports.

I am sure there will be plenty of noise created in the political arena as well.

The next big news item will likely come from the Federal Reserve after their two-day meeting next week.

We will all be looking for clarity around the beginning of the end of their easy money program. Will they give guidance on their intentions to stop buying bonds every month which helps to pump cash into the economy?

We will parse through the corporate and economic data released and share the results in future “Weekly Insights”. I want to stress that we will continue to separate the news (facts) from the noise in our weekly insights.

Keep an eye on price increases. Inflation remains well above the Federal Reserve’s 2% annual target. Companies are still struggling with shortages, bottlenecks, and transportation difficulties in the wake of the coronavirus pandemic.

How large of a jump in prices are we, the consumer, willing to absorb before changing our spending habits? Another important question to be answered is what effect will supply issues and price changes have on the Christmas shopping season?

The Covid effect reared its ugly head a week ago in the release of the University of Michigan Survey of Consumers.

People surveyed said they would change their behavior to adjust to the concerns created from the Delta variant. This reaction to the variant is leading the way for the economic forecast changes described already. However, saying you will change your behavior, answering a survey question, and changing it are two different things.

For instance, I spent Labor Day weekend visiting my oldest son, Cole, a UNC Charlotte marching band member. The 49ers defeated Duke for their first-ever win over a power five conference school (a quick plug for the Charlotte “Niner Nation”). The win was celebrated in front of a sold-out stadium with long lines for the concessions stands and merchandise stores.

The following morning, we waited in line to get into a breakfast establishment and endured crowded stores as we helped him restock his dorm room before heading home. This same scene was carried out across college campuses all over the country.

Not to be outdone, the NFL kickoff weekend did not show signs of Covid concern either. More packed stadiums and tailgate parties rather than shelter in place and watch the game from home. So far, the survey answers seem detached from reality.

Yes, many corporations have delayed their reopening for workers to return to the office.

However, colleges are back in session, and people have not traded in their event tickets in combination with a night on the town for dinner and a movie at home. AMC reported that Labor Day weekend at the box office saw the largest number of moviegoers since before the pandemic started.

Look around your town. What do your eyes see – shut down, slow down, or full steam ahead?

Economists are downgrading their forecasts, but my eyes are telling me something different is going on. An increase or decrease in consumer spending will appear in both the economic data and the corporate earnings reports. We will just have to wait and see how this plays out and adjust your portfolio accordingly.

Risk management is a data-driven process, and we will parse through the data and share the results in future “Weekly Insights.”

I wish I had a nickel for every time I heard this phrase over the last several weeks. This is not a fact or a reason to act but potentially a flawed opinion on sentiment.

Psychology is not a reason to react, but emotions are hard to overcome, and acting on them usually leads to our detriment.

How far the market has run is not a prediction of how far it can run. Yes, market conditions over time share similarities, but history does not exactly repeat itself.

Daniel Kahneman talks about the “Anchor Effect” in his best-selling book, Thinking Fast and Slow. The anchoring effect refers to projecting a value of an unknown quantity, future stock market returns, without doing the work to determine a proper value or worse projecting a value based on a past event. Emotion wins out over process.

For example, here is one thought. “The last time we had a horrible out-of-control outbreak with Covid, the stock market did not fare so well.” Therefore, since Covid is out of control again, the stock market should react similarly this time.

However, the last time shelter-in-place ruled the day. As our knowledge of how the virus operates, shelter-in-place is not a likely outcome. I do not have a crystal ball, but what I have seen with my own eyes does not look like people are canceling their plans and staying home.

The stock market is going to do what it is going to do. It typically does not go down just because it has been a solid year so far, nor does a variant necessarily command the same economic reaction as the previous virus outbreak.

Let facts dictate when and how to employ risk management in your portfolio, not emotion, especially fear.

If you have questions or just want to discuss the current state of the market and your portfolio in greater detail, we stand ready to explain how we are helping you navigate this choppy market.

Do not hesitate to call.

Thank you for your trust and confidence in our services.

Have a wonderful week!

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)

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