PAPER TIGER?
In last week’s Monday email to you, I opined there might be two awakened tigers, one being inflation and the second the highly infectious Delta coronavirus variant and, as if on cue, financial markets worldwide tumbled Monday and Tuesday. The reason was, of course, concerns that the escalating case numbers of those infected and renewed shutdowns would severely impact the improving global economies.
However, by Wednesday investors appeared to emulate Mad Magazine’s Alfred E. Neuman’s famous quote, “What, me worry?” Despite Covid infections still surging, with zero signs of abating, and new reports indicating as many as 20% may be in fully vaccinated individuals, financial markets recovered all their losses and then some!!
The Dow Jones closed above 35,000 for the first time, rising 1% for the week, despite dropping more than 700 points on Monday. The S&P 500 rose 2% and the Nasdaq added 2.8%. Gains, with few exceptions, were global in nature and across most sectors. Our TSX’s rise of 1% was middle of the pack, well behind the US and most European indices. The Canadian dollar, which had recently lost much of its 2021 gains, rose 0.4%, welcome news for desperate snowbirds when border restrictions are eventually lifted.
Why the rapid turnaround?
- Was it the impressive corporate earnings reports? So far, 85% of American companies reporting 2nd quarter results beat analysts’ expectations.
- Was it the surveys of European companies reporting the strongest increase in activity in 20 years?
- Was it nervous investors regretting their Monday panic? Lipper Inc., which tracks these things, reported equity fund outflows of $8.8 billion for the week ending 21-Jul vs inflows of $628M in w/e 14-Jul. So maybe it was a late-week reversal of this trend, and remorseful buyers finding a dearth of remaining sellers and thus forcing prices higher?
- Was it that, for the most part, SO FAR, the US infections are in states that economically play a relatively smaller part of US GDP?
It does NOT appear that Variant D is anywhere close to peak. This weekend Florida (by no means a minor economic state) reported a 15.1% positivity rate and more coronavirus cases (73,199) this past week than California, Texas, New York, and Illinois combined. It was the state’s biggest one-week surge since January 27, 2021.
So, going forward, I think we should expect more of the whiplash economic /Covid/shutdown news and corresponding volatile reactions by financial markets.
And to end on my other Tiger note of last week – inflation. If one considers that the decades-long move of US manufacturing to China had to be disinflationary to US labor and to US goods prices, how can any reversal of that move be anything but inflationary? It is not by chance that the ten biggest container ports in the world are in China.
