The UK, with a full vaccination rate of 47.2% and a partial vaccination rate of 64.7%, is experiencing a 4th wave of COVID that has delayed their reopening plans, and may result in school closures this fall. On May 24, their 7-day average number of new cases was 2,073. Today it is 9,584 and climbing. The delta variant is now dominant in the UK, and it is estimated to be between 43% and 90% more transmissible than the alpha variant we dealt with last year. In layman’s terms, that means a lot fewer people will be escaping an office, airplane, hospital, church, or restaurant uninflected if there is an infected person present. Delta is also thought to result in more hospitalizations. Everything in the US has largely reopened, which is in contrast to the partially-opened UK.
Meanwhile, the US’s 7-day average number of cases has been falling dramatically, from 24,769 on May 24 to 11,139 today. The US full vaccination rate is a little worse than the UK’s at 45.8% and the partial vaccination rate is much worse at 54.1%. Delta only comprises about 20% of cases in the US now, but is expected to become dominant within 2-3 weeks due to its higher infectiousness.
We’re farther from herd immunity in the US than the UK is, so it seems reasonable to expect the US will experience a 4th wave like the UK, and maybe a bit worse.
UK stocks (EWU) have underperformed the S&P500 by about 3.5% in the past 30 days as their 4th wave hit, after largely keeping pace for the previous several months. The US experience might be different though, because investors perceive rising interest rates and inflation as the main risk to stocks, and a 4th wave would go a long way toward alleviating those concerns. If there’s anything we learned in 2020 it is that US stocks do not at all track bad news on infections! The remote possibility of additional stimulus measures is an unexpected low-probability upside that could nonetheless contribute to stock prices. Tech should do better than other sectors, if the past is any guide. Bond yields could fall back to January or February levels in July, so long calls or bull spreads in TLT might be lucrative. Finally, the VIX seems a bit complacent at 16.5, so bullish options plays on volatility might be a great hedge. .
Your thoughts?