Why Stocks are Soaring Amid the Delta Surge

Shoppers walking past discount signs
Credit: Phil Noble - Reuters /

Once again, something odd is happening in U.S. stock markets: They are thriving, even as the world seems to be succumbing to a new wave of Covid infections, driven by the transmissible Delta variant. 

On Friday, the S&P 500 and The Nasdaq Composite added 0.8% and 1.2%, hitting new records during the trading session. The Dow Jones Industrial Average also gained 0.6%, and is approaching its own all-time high. All three stock indexes are up in the last month. 

Simultaneously, Covid-19 infections in the U.S. are approaching their grim, previous records. The number of new daily cases is averaging above 150,00, a 20% bump in the last 14 days -- and a staggering increase from just 12,000 daily cases on July 4. Predictably, hospitalizations and daily deaths are on the rise. 

The resurgence of Covid is dampening consumer enthusiasm. The TSA recorded its lowest air travel numbers last week since May as worried travelers canceled flights. Retail sales declined 1.1% in July, worse than analysts’ expectations. These numbers are likely to decrease even more as summer turns to fall, forcing more people to congregate indoors -- and thereby driving infection rates even higher. 

All this raises the question: How are stocks continuing to set new records amid such a bleak public health outlook?

For one, the Federal Reserve continues to safeguard asset prices with its accommodative policies. Speaking on Friday, Fed Chairman Jerome Powell said the central bank would reel in its asset purchase program, but he headed off concerns of interest rate hawkishness with remarks that seem designed to pacify jittery investors: “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test,” said Powell. 

Investors are also taking comfort in the fact that Powell’s dovish stance seems here to stay. Treasury Secretary Janet Yellen has backed Powell for a second term as Fed chair, according to recent reporting from Bloomberg. The prospect of a second term of Powell-nomics is cause for celebration among stock market investors, given the former banker’s commitment to keeping asset prices elevated.

But it’s not just the Federal Reserve that is propping up stocks; local and state authorities are also playing a role (albeit a more indirect one) in sustaining the economic momentum. Unlike the beginning of the pandemic (and last winter) when Democratic-controlled cities and states restricted indoor dining and other forms of physical congregation, leaders of all political stripes are now shunning restrictive measures.

A reluctance to reinstate shutdown orders is especially important for economic vitality as emergency-era policies expire or are overturned: The $300 boost for unemployment insurance ends next week and the Supreme Court ended the federal eviction moratorium last week. While these economic measures are controversial, they are likely to alleviate the labor market shortage. That should quell concerns of inflation, which in turn buttresses the Fed’s commitment to keeping interest rates down. 

In sum, stock market indices continue to be supported by an accommodative central bank, while evolving policy responses to the (seemingly never-ending) pandemic are more supportive of a robust private sector than in prior times. No wonder investors remain bullish.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

John Hyatt

John Hyatt is a freelance journalist covering financial services, market structure, stocks and IPOs, and private equity. Prior to entering journalism, John worked in public relations for clients in financial services, investment management, fintech and cryptocurrency. John is currently receiving his M.A. in business and economic reporting from NYU as a Marjorie Deane fellow.

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