After a yearlong delay due to Covid-19, the 2020 Tokyo Olympics are finally underway despite withdrawals from many high profile athletes. The Games, the first ever without spectators, promises to be among the strangest and most fraught in history. The opening ceremonies kicked off in a mostly empty stadium due to pandemic restrictions. Just hours ahead of the opening, organizers reported a record number of new daily infections linked to the Games. The event, being conducted in Japan, where vaccination rates lag other developed countries, appears to have all the characteristics of ill-timed and ill-advised mass gathering that have occurred over the past 12 months. The result will likely be the same – spread of Covid related infections and the deaths of an unfortunate few.
Wall Street was quick to react to the depressing news of the delta variant proliferating across the world with a massive sell off early in the week but recouped the losses and started hitting new highs as the earnings season rolled out later the week. Strong results from US companies coupled with positive updates on housing starts, construction data, existing home sales and the latest round of PMI numbers appeared to shake off the uncertainty related to the latest surge in Covid infections.
The question on everyone’s mind is “What will happen if we go back into a state of restrictions and lockdown?”
Future Wealth’s View
The divergence in reactions from the reality on the ground – The Olympics, and enthusiasm over backward looking datapoints – The economic data and earnings results, is telling us that we may be in for an unpleasant surprise in August. The Olympics, with all due respect to all the athletes who trained for the event, should have been cancelled and rescheduled to 2022. The high profile event is sure to attract extensive news coverage which will only serve to highlight the continued spread of Covid masking the significant achievements that athletes will be posting over the next few weeks in Japan.
If the delta variant is not controlled and begins to infect those who are already vaccinated, we could be in for a major correction on Wall Street. And this time, the reopening trade which has taken the market to new highs may not be so kind to investors. In fact, we expect it to be a “confusion trade” which means we could witness the market struggling to find a catalyst amidst the uncertainty. In the meantime, it is best to hunker down and not chase the market now. The ending of the chase may not be pretty.