Equity markets are being pulled lower as investors worry about rising global COVID-19 cases driven by the Delta variant. Anthony Okolie speaks with David Sykes, Head of Public Equities, TDAM, about the variant-fueled volatility.
Hi, Anthony. Hope you're doing well. So, it's always a caution of my not to try and extrapolate on a day's information or a few hours of market information. But I would say, broadly speaking, when I woke up very early this morning, you saw that futures for equities were off quite a bit. And as we speak now that the Dow is up 900 points, the S&P 500 is off 2% or more. And I think really what the equity market is focused on this morning is this concern about the emergence of this new Delta variant. It seems as if the U.K. reopened this weekend. You're seeing new case counts rise there. There's concern about some media stories coming out of Israel. And perhaps the Pfizer vaccine isn't quite as efficacious as we thought. Concerns among the unvaccinated in the United States that case counts are on the rise. It's really been spurred by this concern about the Delta variant. And what does that really mean for the chances of reopening the economy and reaccelerating getting back to normal?
And let's talk a little bit about the bond market, meanwhile, which has been falling dramatically as we see investors taking risk off the table. What's the bond market telling us right now?
Yeah, it's been very, very interesting. I think the market has expected, or market participants probably more accurately, have expected yields to rise. You've seen the 10-year Treasury yield in the United States today dropped. And so, you know, bonds are rallying and we're now below that 1.2%. It's hard to sort of digest any particular signal today, this minute, the next few hours. But I think there's a few concerns. One is clearly a flight to safety. You also see that in the rising US dollar, this Delta variant, maybe this is a real concern for the bond market. Perhaps the bond market is telling us that yields in the US, even at 1.2% compared to other jurisdictions, Japan, Europe, are inexpensive to their buyers there. Perhaps it's pension funds trying to immunize some of those liabilities after such a high run in stocks over the last 10, 12 months. It's hard to say exactly what it is, but I think certainly a lot of market participants have been surprised by yields and how low they've gone, not just the United States, but in Canada and around the world.
And Dave, you talk about the rise of the markets over the past 12 months. Given all the uncertainty, we're seeing volatility index spike above 20, hitting the highest level since May. Now, given the new Delta variant, will this volatility subside or do you expect it to continue?
Anthony, given Delta and the concerns, and given the virus more broadly, I don't see volatility going away any time soon. At the heart of this, it's the unknown, the uncertainty about this health care crisis. And I don't think there's going to be one magic silver bullet that solves all of this. So there's going to be ebbs and flows. I think we're slowly reopening, but vaccines are rolling out. People are getting vaccinated. It's going to take time and there's going to be ups and downs. And so I would fully expect volatility to continue.
And now, apart from the Delta variant, of course, inflation continues to be a story and a concern among investors. We saw US CPI accelerated at its fastest pace in 13 years. Is this another risk for the market in the near term?
Yes. So there's no question that the market would not like to see higher rates of inflation a year from now, two years from now. Clearly, if that were the case, that would provoke fears of higher interest rates. You definitely wouldn't want to see higher interest rates given where government debt levels are. And so clearly, inflation and inflation concerns is something the market's focused on. Believe it or not, the market isn't that worried. If you look at sort of forward looking indicators of inflation, the market isn't particularly worried that it's going to get out of control. But it is something that the Federal Reserve and other central banks are really focused on, to say this is transitory, you're going to see a spike in inflation now. But a year from now or two years from now, as we get through COVID, as you get supply chains back, as the prices of used cars and air travel and hotels come down, this should see a moderation in the year over year rate of inflation. But if that's incorrect, that is a big risk to the market. Currently, we're in the camp that this is transitory, but we're definitely watching it because a prolonged, higher pushing inflation would not necessarily mean great things for interest rates and definitely not such a great thing for the stock market either.
Okay, so given your perspective, given all of this, looking into the second half of 2021, what's your outlook and what should investors really focus on?
I think from an equity market perspective, which is where my focus is, I think there's really two big pieces that you want to watch. One is, I think you're going to see case counts increase. I do think COVID case counts are going to continue among the unvaccinated or among that group of the population that have been vaccinated, but perhaps the efficacy wanes. And the thing to watch for is will those case counts lead to severe outcomes? And by that I mean does a case of COVID lead to a hospitalization or a death. If we can break that link, if the case count goes up, but the severity doesn't, I think that means very good things to the economy and reopening of the stock market. And then the second thing I would really look for is the jobs market. We really need to see a rebound continue in the United States and in Canada. And if the variant gets under control, if we can get ahead of COVID, if it seems like it's waning, those jobs should come back. We should start to see the economy continue to recover. And I think that would bode good thing for the economy and earnings as well. But let's not forget, to this point in time, we're up something like 15% of the United States, a little bit more in Canada. It's been a pretty good year and I wouldn't certainly expect those kind of returns in the second half.
David, thank you very much for your time.
Thanks very much.