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A Whipsaw Week for Traders

Last week’s shallow decline of the major averages culminated in a dramatic selloff of the broad market this past Monday. It was prompted by news of the accelerating spread of the Delta Variant just as the reopening was gaining momentum. That day also brought a steep decline in the 10-year bond yield that had some heads exploding on CNBC as experts pondered whether we were seeing the start of a correction, or worse, and a pause in the global recovery. The drama was over by the next morning as investors bought the dip and traders soon followed. What many had hoped would be a buying opportunity of a week or two lasted a mere six and a half hours. Those investors who wanted more exposure to the attractive Cyclical sectors had little opportunity to capitalize on some bargain prices. At Monday’s low the major averages had retreated almost 4% from their record highs before reclaiming that ground the next day and then posting new record intra-day highs by the end of the week.

Monday’s selloff was noteworthy in that we saw all of the major indexes decline in sync. That’s a sign of capital heading to the sidelines, however briefly, and we would attribute that to traders and not investors. The latter, those with investment horizons measured in years rather than days, likely decided to do what they do most often…nothing. As we said in our recent letter to clients, remaining diversified across numerous sectors in some proportion and focused on the longer-term outlook should continue to serve them well as we navigate toward full recovery. There’ll be bumps and detours along the way but the US economy is awash in liquidity and is not demand-challenged. The variables are on the supply side and what government’s response to the resurgence of the virus might be.

That being said, the rise of the Delta Variant is increasing predominantly among the unvaccinated. That’s important in assessing the likelihood of a lockdown similar to that of 2020 and its effect on the economy this year and next. We believe investors are banking on a measured response from authorities rather than the sweeping shutdowns of businesses and events we witnessed in 2020.

The volatility of the 10-year treasury will no doubt fuel the continuing inflation debate. We haven’t deviated from our view that CPI data will moderate in the second half, providing cover for the Fed in holding to their schedule for tapering bond purchases sometime next year. Traders may not react positively to tapering, whenever it happens. We, as investors, will see it as a signal that the economy has achieved a sustainable growth trajectory that no longer requires a push from the Fed. We would welcome that as a major step toward full recovery and view any market pullback as temporary and an opportunity. Stay tuned.

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