MANHATTAN (CN) — Still basking in a successful first half of 2021, Wall Street got a splash of cold water in the face earlier this week as markets fell, only to quickly forge ahead on another winning week.
From a down of about 350 points earlier that day, the Dow Jones Industrial Average lost about 250 points Thursday. The S&P 500 fell about 60 points while the Nasdaq lost more than 100 points on Thursday.
Fortunately, on Friday those concerns were allayed somewhat. The Dow gained 1.3% on Friday to finish the week up 83 points. The S&P 500 and Nasdaq also both notched big wins on Friday, eking out increases of 17 points and 62 points, respectively, since last week.
Thursday’s plunge in the markets was mainly due to concerns about the delta variant of Covid-19, which has become the foremost variant causing infections, hospitalizations, and deaths in many areas.
One such area is Japan, which announced on Thursday that the summer Olympics set to begin on July 23 in host city Tokyo would continue without any spectators. Medical experts had warned that Japan, which still has not vaccinated a majority of its citizenry, was courting catastrophe by hosting the games with spectators.
The delta variant is considered more virulent than other variations of Covid-19, but researchers have so far found that two doses of ether the Pfizer or AstraZeneca vaccine was enough to neutralize the variant. Those who received just one shot of either vaccine were considered poorly or not at all protected against the delta variant, but Pfizer announced on Thursday that it was developing a booster shot to target the delta variant.
Another concerning factor is that many scientists believe those who have been vaccinated can still transmit the delta variant, which is now the most dominant strain in the United States. The strain has been verified in more than 90 countries.
James Vogt at Tower Bridge Advisors wrote that “short-term fear is here for now” and that investors’ primary concern is major economies shuttering again in the fall if cases continue to rise. “Delta variant fears will crimp the reopening phase and point to somewhat slower growth than initially hoped for, albeit still driving in the right direction,” he wrote on Friday.
“Even with vaccines, many are still concerned about this deadly disease. Anything that makes them more cautious is obviously not good for growth,” Vogt wrote. “Eventually vaccines will be readily available worldwide and we’ll get past closures for good.”
Concern over the virus has reared its head primarily in the bond market. On Thursday, yields on U.S. treasuries fell again on those fears, with the 10-year Treasury at one point dropping below 1.25%, its lowest mark in months. On Friday, the 10-year yield climbed back up to hit 1.35% by the closing bell, though it is still nowhere near the 1.75% it was back in March.
As a result of the new data, some previously optimistic analysts have tamped down their expectations. Paul Ashworth, chief economist for Capital Economics, changed his forecast for gross domestic product growth to below 6% for 2021, though he expects 10-year Treasuries to rebound during the second half of this year.
“The initial rise in that yield earlier this year was principally due to a significant rebound in inflation compensation,” he wrote in an investor’s note on Friday. “But even though the actual [consumer price index] inflation data has surprised on the upside, compensation has fallen back slightly over the past couple of months.”
He added that, “even if the real yield component remains muted, there are good reasons to expect a rebound in inflation compensation to push up long-term nominal yields in the second half of this year.”
The good news is that investors are also “starting to give up on the idea of structurally higher U.S inflation,” according to Nicholas Colas and Jessica Rabe at DataTrek Research, who believe the economy is in a transitory phase for inflation and based mostly around idiosyncratic items like used cars and gasoline rather than structural, across-the-board inflation.
“Looking into the back half of 2021, this may well be the single most important data point to watch,” they wrote. “If inflation expectations start to pick up again, markets will rightly worry if the Federal Reserve will have to raise rates sooner. If they continue to trend lower, then the market’s expectation of one rate increase in 2022 will be a safe assumption.”
The Fed has indicated it is considering tapering off its bond purchases, but markets have expected the central bank will do so possibly as early as next year and with an announcement possibly this fall.
“Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data,” the Federal Open Markets Committee noted in minutes from its June 15 to 16 meeting released on Wednesday.
Investors also were somewhat disheartened by another uptick in new unemployment claims. According to the Labor Department, initial claims rose to 373,000 for the week ending July 3, compared with the revised number of 371,000 the prior week and 416,000 the week before that. Pennsylvania and Texas saw the biggest increases in new claims last week, reporting 5,100 and 3,800 new claims, respectively.
“While we foresee a stellar labor market performance this year with the economy expected to recoup a total of 8 million jobs, the return to a pre-Covid environment won’t happen overnight and we should be prepared for labor demand and labor supply to be bumpy in the second half of the year as the economy gradually returns to a new post-pandemic normal,” wrote analyst Lydia Boussour of Oxford Economics.
She noted that the unemployed-to-job-opening ratio remains about one to one, but added that in many industries some services have fewer than one unemployed worker available for each opening. Leisure and hospitality, and health and education services, are among such industries, she wrote.
The current positive pace of the market could be helped next week, when corporate earnings from a number of companies — including JPMorgan Chase, Goldman Sachs, PepsiCo and UnitedHealth Group — may help buoy investors, as they have at various points throughout the pandemic.
Follow Nick Rummell on Twitter.
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