Keep Your Powder Dry

Date: 07/19/2021
Author: Mr. X


As this is written, futures are up for Tuesday morning. Of course, this follows a drop of more than 725 points in the Dow and 152 points in the NASDAQ composite Monday.

At a time like this, keep your powder dry. Don’t overreact either way.

The collapse wasn’t unexpected or unexplainable. There have been lingering worries that the bond market, along with the Federal Reserve, has been underestimating the extent and longevity of inflation. More importantly, the premise that the global recovery is underway has been significantly undercut by the spread of the Delta variant of COVID-19.

Cryptocurrency was especially hard hit, with the overall market dropping more than 3.5% and Bitcoin struggling to remain above $30,000. This represents a significant departure from what we saw earlier in the pandemic, when Bitcoin’s rise coincided with lockdowns and the fall of the retail economy.

If the Delta variant continues to spread, the implications for the global economy could be catastrophic. Thus far, there are reports that the vaccines, while far better than nothing, are not as effective against this variant than they were against the original strain of COVID-19. With protests occurring in cities around the world, it’s also unclear that the political willpower is there to enforce lockdown orders. We could entering politically and economically uncharted territory.

Nonetheless, there will be notable opportunities, particularly in vaccines. Defying the overall trend Monday were a number of biotech stocks. Among them were BioNTech SE [BNTX], up almost 5%, Moderna [MRNA], which rose almost 9.5%, Inovio [INO], which gained over 8%, and an incredible 12.78% gain for Novavax [NVAX]. We may see greater pressure for vaccination and more competition among companies about who can develop the most effective shot – giving some of the companies that didn’t win the first round of the COVID-19 competition a second chance.

However, this doesn’t mean investors should necessarily assume the worst is over. While markets will probably recover early Tuesday morning, whether that will continue depends on two factors. The first is obviously whether the spread of COVID-19 can be contained. The second, and arguably even more complicated, is the fate of the infrastructure bill in Congress.

This bill has been proclaimed dead or alive more times than a villain from a slasher movie. Markets soared just a few weeks ago following the triumphant announcement of a deal between Senate Republicans and the Biden Administration. However, soon afterward, progressives pressured the Biden White House into committing to a second bill after the compromise that would provide additional funding for childcare and education. The Democratic line is that this is a kind of human infrastructure.

Whether it is or not, Republicans in the Senate are not going to go along with it. Meanwhile, progressives, now rid of President Donald Trump, are increasingly weary of President Joe Biden’s perceived caution.

President Biden himself has sounded an uncertain trumpet. At first, he said that he would veto the initial infrastructure bill unless there was a follow-up bill with more domestic spending. After a backlash, he reversed himself and said that he wouldn’t necessarily veto the first bill. At the same time, Republicans suddenly became far more hostile to the first bill as soon as Democrats started saying they would push through a second bill without GOP support.

Senate Majority Leader Chuck Schumer says that debate will begin Wednesday on an infrastructure bill. However, Republicans have promised to block the bill unless there is yet another deal before then. In theory, the Democrats could steamroll the Republicans through budget resolution. In practice, at least two Democrats in the Senate are hesitant to dispense with the filibuster, especially Senator Joe Manchin of West Virginia. It’s worth noting that Donald Trump won West Virginia by 42 points in 2016 and almost 39 points in 2020. It’s not a coincidence that Governor Jim Justice, a former Democrat, became a Republican after Donald Trump won the White House.

Progressives may think that these Senate “moderates” are being cowardly. Most polls show strong support for the infrastructure bill and for more coronavirus spending. However, the Democratic margin in the House actually shrank in 2020. While the GOP has some notably weak candidates going into what should be a strong electoral cycle, there is no guarantee that the Democrats will hold on to control. If COVID-19 returns, the economy sharply declines, and political divisions over lockdowns dominate the 2022 midterms, Democrats will be very glad if the filibuster remains in place just in case there is a GOP House and Senate and a fired up Republican Party in 2024.

Of course, what investors should be rooting for is a compromise solution. The market has long since priced in an infrastructure bill and the lack of more federal spending could deal a crippling blow to any emerging bullish sentiment. Unfortunately, there are those in both parties who could argue that a failure to pass such a bill could give them an advantage – as long as they can pin inaction on the other side.

Normally, when it comes to predicting what the market will do, it’s best to look at the Federal Reserve. Instead, keep your eyes fixed on the Hill – and the new caseload reports that come out of the CDC. If there’s no action on the former and more bad news from the latter, vaccine stocks may be one of the few growing sectors in the months ahead.

Just remember, no matter how bad things get, there is always a bull market somewhere.

 

 

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