Delta Variant Will Likely Affect Economy, But Portfolio Adjustments May Not Be Necessary

Last Updated on July 23, 2021

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The Delta variant has not yet drawn a very strong response from investors. Perhaps the limited response is the right one. 

In recent months, investors have been optimistic about a recovery, largely on the back of news that the existing (and expanding) range of anti-Covid vaccines are working, and that the disease is as a consequence losing its grip on the industrialized world.  

Its grip on the developing world has always been another matter. But, frankly, the cold-hearted assumption has been that the industrialized world can hold a recovery on its own. 

The general attitude seems to be: “the pandemic is receding, travel and eating (indoors) in restaurants are back, former students will soon go back to repaying their college loans,  and we’ll rework our portfolios accordingly.”

Now comes news of the Delta variant, and the threat it poses. Should this — or will this– ruin the party?

Saikat Chatterjee and Ritvik Carvolho, of Reuters, expressed this return-to-2020 pessimism recently. The investing inferences they draw from it? Utilities are a sound investment, they suggest, as traditional “defensive stocks” for a diversified portfolio. And the U.S. dollar can be expected to strengthen vis-a-vis other currencies, because flight to the dollar has long been a defensive reflex.

Chatterjee and Carvolho cite Ulrich Leuchtmann, the head of foreign exchange at Commerzbank, saying that unless production and consumption pick up soon, “a permanently lower GDP path has to be assumed.” 

That does sound gloomy. But it seems a little less so after a close reading. Leuchtmann is not saying the recovery has failed, or that the Delta variant has killed it, just that recovery is still tentative, and that it has only a brief window left in which to prove its mettle. 

Delta Variant and Portfolio
The best investing advice is probably to prepare a portfolio for a continuing, though modest, recovery. Photo credit: Shutterstock.com

Investors are Shrugging

On another reading, though, investors still believe that the pandemic is receding and that recovery will proceed. A headline writer for the Nasdaq news service put it with concision, investors are “shrugging off the Delta variant.

Beneath that headline, a story by John Hyatt outlines the next normal. Covid, in one variant or another, is going to stay. And the world will have to learn to live with it. Booster shots may become an annual ritual. In the meantime, deaths will go down because the vaccines have been protecting their recipients against severe outcomes, even in the case of “breakthroughs.”

We’re not going back to 2020, but we aren’t going back to 2019 either. Either way, we are moving forward. Further, as Hyatt points out that “U.S. jobless data released this week show that in July, the number of Americans receiving jobless payments fell to the lowest amount since the beginning of the pandemic” and that retail sales have risen for three consecutive months. Perhaps stocking up on “defensive” investments isn’t necessary after all?

Where is Gold Headed?  

Gold is one of the usual defensive assets. A writer at Investing.com, Arkadiusz Sieron, advises people not to turn into gold bugs. Delta is not going to mutate gold into the next hot portfolio talisman. 

Another “Great Lockdown,” Sieron writes, is unlikely. Even if the Delta variant leads government to reintroduce “some restrictions, their economic impact will be much smaller than during the earlier waves, as economies have adapted to operating under the epidemiological regime.” 

The best investing advice is probably to prepare a portfolio for a continuing, though modest, recovery. It will be modest in part because of the geographical limitation mentioned above. To much of the world there is still a pandemic raging in the strength of youth, and we will be able to move forward with greater confidence only when it is defeated there and we can all move forward. 

The best investing advice, as always, includes recommendations to diversify. Include some of those defensive assets. But don’t overdo it — you may be in a position to take the offensive.