- With the Delta variant surging, COVID worries on once again on the rise.
- But there’s no reason to worry about the US economy, even with new restrictions being floated.
- A helpful Fed, the encouraging data around vaccines, and flush consumers should keep the economy chugging along.
- This is an opinion column. The thoughts expressed are those of the author.
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Markets plunged earlier this week as concerns about the outlook swelled. The fear is in many ways understandable. COVID conditions, at least as proxied by cases, are deteriorating. At the same time, worrying economic trends have popped up in the form of a potentially more aggressive Federal Reserve and the market reflecting signs of weakening growth.
But just as stocks have mostly shrugged off their heartburn from earlier in the week, so too should you not get concerned about these developments. There’s good reason to believe the US economy is going to hold up just fine.
The bad news
First, let’s see why people are getting spooked.
First is the COVID story. In the US, hospitalizations are on the rise and case positivity is at its highest rate since April. Policymakers are even bringing up the possibility of renewed restrictions in some areas. In response, reopening stocks got clipped. Carnival Cruise Lines and Delta Airlines saw big drop offs early in the week and have sunk over the last few months. Planet Fitness is down while Peloton is up sharply. In other words, these companies are trading as if it is spring 2020 again and there is no effective vaccine.
Next, there are worries over the Fed’s next meeting and whether the central bank is ready to take the foot off the gas when it comes to helping the economy. The market’s current expectations for tapering – when the Fed will ease its support by slowing its buying of bonds – is for the process to begin sometime late this year, as recently reported by the WSJ. At any rate, it’s odd to see the Fed tapering while concerns around COVID appear to be climbing.
Finally, growth concerns appear to be picking up. Corporate credit conditions, basically how affordable it is for companies to take on and pay back debt, are getting worse. This is a sign that investors don’t think the booming pace of economic growth can keep up.
The good news
So, why don’t I buy into the worries?
First, COVID is endemic. There is no doing away with it, but there is managing it. What I see shows that places that are vaccinated are not seeing a large increase in hospitalizations or deaths. The Delta variant originated in India, a population that does not have a large percent of its population vaccinated and cases there have declined quite sharply in recent weeks. In the UK, hospitalizations and deaths remain far below where they were the last time cases were this high. So there is a good chance this wave ends up not being as devastating – in human or economic terms – as previous waves that have caused serious pain.
Moreover, it is not clear where the constituency is for new mitigation measures to slow the spread of the virus. Vaccinated people are still relatively safe from hospitalization and severe illness, and unlikely to spread the virus in a material way. Unvaccinated people, by and large, do not want the mitigation measures in the first place. So despite saber rattling, political leaders might be reluctant to back off current reopening plans. The train has left the station.
Second, I do not think the Fed is going to abruptly shift policy and ease its support for the economy. New members of the Fed’s interest rate setting committee are going to be even more unlikely to hike rates or taper off support in a serious way. The Fed has made it clear that they are willing to tolerate higher inflation to achieve its expansive goals on employment.
Finally, I don’t see much downside to the economy. Consumers remain flush with cash and the spending boom continues. Inventories remain low and companies are likely to order plenty of new goods to stock their shelves in the months ahead, supporting manufacturing production. Homebuilders are working through backlogs, particularly now as construction costs have moderated, supporting residential investment. Capital spending intentions remain strong.
What does all this mean?
If I am right, then we should expect a sharp reversal of these moves in September. Dovish Fed plus stronger economy plus waning COVID equals back to risk on.