Why Are Stocks Still Surging in the Face of the Delta Variant?

For a lot of people, the current situation of the stock market, and other financial markets for that matter, makes little sense. Every time they turn on the TV or go to a news sight, they are told that Covid is resurgent, both here in the States and around the world, and yet the major stock indices keep hitting record highs. The delta variant has us on the run again, but traders and investors seem not to care. There are multiple reasons for that shoulder-shrugging attitude to what looks like a major crisis.

The first comes under the category of “once bitten, twice shy.” We all remember the collapse that happened as the pandemic surged in the spring of last year, but those who sold during that big drop and were slow to buy back will remember it particularly well. The market came around to the idea that the massive disruptions to economic activity that came with the shutdowns would inevitably be temporary and stocks bounced back rapidly.

Those who lost money on that bounce are reluctant to make the same mistake again.

This time around, the selling has been more targeted. The so-called recovery plays -- travel and leisure stocks and the like -- have come off their highs as delta has taken hold. Meanwhile, sectors more representative of the overall economy -- financials, industrials, tech, and energy for example -- have more than made up for those areas of weakness. When traders and investors sell something covid-related, they waste no time putting their money to work in something else. As a result, we see some cyclical shifts, but continued overall strength.

And there is still an awful lot of money around to support that. If you are a regular reader of my musings, you will probably think that I am starting to sound like a broken record here, but the fact is that both the Federal Reserve Bank and the federal government are still pumping trillions of dollars into an economy that is now booming. I am not concerned here with the wisdom of that, nor with potential long-term consequences, just with the fact that it is happening.

The first rule of money management is that cash always seeks a return and with real interest rates (the return once inflation is factored in) on bonds being negative, stocks are the logical place for those trillions to land. There is natural and growing support for the market and, until that situation changes, every selloff will hit a wall of buyers before too long.

That has led to valuations that look a bit stretched, but the economic impact of even the rise in Covid cases has been limited. The current crisis is centered in states with low vaccination rates and laws that ban mask mandates. This is seen by traders and investors as something that will be mitigated as the stark reality of overburdened hospitals and thousands of deaths changes attitudes. That belief may involve more faith in the logical nature of people than recent history suggests is justified, but it is understandable.

Most of all though, delta notwithstanding, the U.S. and global economies are strong. Demand is high as consumer behavior normalizes, as shown in commodity prices. Oil has stabilized above pre-pandemic levels even as supply has increased and copper is holding above $4 despite a bounce back in inventories. Housing prices are soaring, inflation is nudging up with demand pull as much of a factor in that as supply push, and unemployment continues to fall.

What this all comes down to is that as much as it feels like the stock market’s failure to react to the surge in the delta variant is illogical, it is actually not that at all. The market doesn’t care about your feelings, it cares only about the facts, and the relevant facts suggest that we will continue to see new highs for a while to come.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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