How Investors Are Handling Covid’s Third Act Twist

The biggest surprises always come in the third act. Covid is no exception.

The Delta variant continues to cause a surge of infections and deaths as 30% of those in the US still remain unvaccinated. As Dr. Anthony Fauci put it, “things are going to get worse.”

As the seven-day average of new daily cases rises businesses and investors are tempering their outlook. Previously the U.S. was experiencing approximately 10,000 cases a day. By early August that figure grew to about 84,000 and continue to increase. Recent estimates suggests that the number could get as high as 200,000 cases a day.

Investors and businesses are already taking action.

How do we know? Money-markets funds and banks are seeking ways to earn a safe and predictable return on their excess cash. They are doing so with a transaction called a reverse repurchase agreements, or “repos.”

In this kind of transaction, the lender purchases an asset like equipment or shares from the seller with an agreement to sell those same assets back to the seller at a set future date for a higher price. Today, money-market funds and banks are engaging in repos to the tune of $1 trillion in cash. This amount is the highest on record since the Federal Reserve allowed these kinds of transactions in 2013. The main reason for the influx of cash is likely the central bank’s decision to inch up their interest rate from 0% to 0.05%.

What is more concerning is the fact that this increase in repos might suggest that more institutions are in need of cash to fund short-term operations.

Meanwhile Moody’s Analytics has designed a “Back-to-Normal Index” intended to track the latest economic data. These metrics include things like the number of people flying, restaurant bookings and initial claims for unemployment benefits. This figure is beginning to look troubling for certain areas of the US, especially the south. Today, the index has fallen from it’s high reached in late June of this year.

Additional nation-wide lockdowns remain unlikely, and many experts believe the increase of hospitalizations will encourage at least some vaccine skeptics to get the shot. Despite this, the expectation for a booming summer and phenomenal second half to 2021 for investors is beginning to dim.

Proactive investors are taking this opportunity to read the road and make their smart moves before it is too late. For many this means keeping a significant amount of dry powder so that they can act when opportunities, like dropping asset prices, are presented. For others it means exploring the possibility of “safe haven” assets like gold that tend to benefit in climates of uncertainty and falling economic and business confidence.

It is too soon to know the extent of Delta’s economic impact. What we do know is that the situation is escalating and creating a picture much different than what most forecasted even one or two months ago. Medical professionals have also warned of the possibility that further variants can develop as we move into the winter months. The covid pandemic will end, but investors need to be prepared for a longer third act.

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