Broker Check

Vaccines, Variants and Volatility

| July 20, 2021

Summer is a great time to be a sports fan, especially if you like baseball, playoff basketball, golf or the smaller Olympic sports like swimming, track and field, cycling and gymnastics that get their day in the sun every four years. This year the Olympics is set to kick off in just a few days in Tokyo after being postponed for the first time ever in 2020 (three times the Olympic games were cancelled due to World Wars I and II but this was the first ever postponement). 

Last week I was listening to a podcast about the Tokyo games and how the games are perceived by the Japanese. I was stunned to hear that only 11% of Japanese are fully vaccinated and many residents are very concerned about the Olympics triggering a major outbreak of COVID in their country. I took it for granted that other developed countries were on the same path as the United States to a high level of fully vaccinated residents (estimates are almost 50% of all US citizens and over 60% of all US adults as of July 19 and almost 70% US adults have at least one dose, Source: CDC). The reasons for the lower rates in Japan are complex – a cultural bias against non domestically produced medicine, the country’s slow attempts to order the Pfizer and Moderna products and an inefficient bureaucratic distribution system. If only one of ten US citizens was vaccinated like in Japan, inviting athletes from every corner of the world to travel and compete here would be a frightening thought to many of us. 

With this backdrop the sharp negative reaction of the financial markets to an increased level of spread of the “delta” variant of COVID starts to make a lot more sense. The economic reopening in the US and corresponding rise in the stock market has clearly been linked to the success in the manufacture and efficient distribution of vaccines. It is amazing to think that the first vaccines were only given emergency use approval in the US in December, 2020 and barely seven months later we’ve reached a high level of vaccinations that has allowed the economy to reopen and by most accounts fire on all cylinders. Economic growth is estimated to be clipping along at almost a 10% rate in the last quarter; product shortages and inflation concerns have been the top news items for months. As recently as last week, the talk of the markets was the Federal Reserve raising rates to counter inflation. 

But financial markets now seem to be paying attention to the variants like delta and lambda, that are spreading throughout the world and might pose a threat to an ongoing comprehensive recovery. With vaccination rates in many parts of the world still at levels similar to that of Japan, the concerns make a lot more sense. The economy is linked at all levels (remember the Ever Given cargo ship stuck in the Suez Canal and all the shipments of goods delayed?) in today’s world. Variants of COVID will likely continue to be a factor in financial markets for a significant time to come. 

Which brings us to volatility. The stock markets have been on a tear on virtually a straight line up for the better part of 15 months since the beginning of April, 2020. The S&P 500 Index is up almost 15% for the year and about 90% from the lows of the market decline last year. By any measure the markets are overdue for some type of correction, whether it is 5%, 10% or greater. The average year sees a 14% intrayear decline in stock prices even though stocks finish with positive returns in a majority of years. Pullbacks in stock prices are normal. The inherent volatility of stock prices is why owning stocks produces a higher rate of return over time than bonds or cash that don’t fluctuate as much. 

So what’s an investor to do in a market environment like this? If you have a plan, stick to it. If you don’t have a plan, get one. It’s a great time to review your portfolio to make sure it is still in balance after the stock gains of the past 15 months. 

If you’re investing for the long term, remember the old Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.” 

Enjoy the sports this summer, hoping for success for all the US athletes competing in the Olympics and safety for everyone involved!

Investors cannot directly invest in indices. Past performance does not guarantee future results.