Staying Prepared for Downside: Issues to Watch for as 2021 Rolls Along

The S&P 500 gained 3% for the month ending July 29. Treasury yields are declining, and earnings growth is mostly notable. In other words, many market participants think it’s a great time to be long equities.

Obviously, it’s a fool errand to fight price action, but investors should prepare for potential headwinds. Some, including the delta variant of the coronavirus, are already emerging. While stocks have been mostly sturdy in the face of those headlines, the need for vaccine boosters and the specter of a potential renewal of some lockdown policies could figure prominently in the risk asset equation as 2021 moves forward.

The delta variant is already weighing on some developing economies, and major developed economies don’t have the luxury of ignoring it, either.

“Meanwhile, countries with high vaccination rates are struggling with upticks in cases as well, including the United Kingdom, France, Spain, and Israel,” writes Invesco Chief Global Market Strategist Kristina Hooper. “As has widely been reported, the United States is struggling with the Delta variant as unvaccinated parts of the population are seeing a surge in hospitalizations.”

As Hooper notes, questions about vaccine effectiveness are on the rise. Israel serves as a case study in that scenario.

“Based on national health statistics, researchers have estimated that the Pfizer vaccine was only 39% effective against preventing COVID-19 infection in Israel between June 20 and July 17,” she said. “This is surprising given that, for a time period that overlaps with this period – June 6 through July 3 — the vaccine was estimated to be 64% effective.”

Similar questions are arising here in the U.S., and Pfizer is already working on a third dose booster to supplement its original two-dose COVID-19 vaccine.

Beyond the pandemic, there’s a long runway ahead in which the Federal Reserve could roil markets either via tapering its asset-buying program – though that’s widely expected – or accelerating its rate hike timeline. One more issue to ponder: The debt ceiling.

“In late June, US Treasury Secretary Janet Yellen warned about this issue, as it impacts the ability of the Treasury to issue bonds and pay its bills,” adds Hooper. “Voting on raising the debt ceiling can be politically dangerous for a substantial portion of Congress, adding an extra layer of dysfunction to an already dysfunctional legislative body.”

Add it all up, and what appears to be a mostly docile environment today could rapidly morph into a turbulent setting.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.