In many ways, July was both the best of times and the worst of times. We saw some good news on the financial front. U.S. markets hit new all-time highs, and earnings reports substantially beat expectations. Dropping interest rates also helped drive markets higher, with bond markets rallying on those lower rates.
Abroad, the news was more of a mixed bag. While developed markets did well (although less so than U.S. markets), emerging markets got hit hard on rising worries about the pandemic and ended the month down substantially.
Let’s take a closer look at the big picture in July—and where that leaves us as we head into August.
Medical Risks Rise in July
Medical risks surge. July saw a substantial increase in infections globally, due largely to the spread of the Delta variant of the COVID-19 virus. This explains the market declines in emerging markets. In the U.S., despite the strong market performance, we saw a similar—or even larger—surge in infections. After declining to low levels in June, daily case growth grew by six times throughout July. The seven-day case growth average, which was 13,400 on June 30, rose to 81,900 on July 31. This trend took us back to where we were in mid-February. Clearly, July saw a major resurgence of medical risks here in the U.S.
Strong U.S. economy. Yet, despite that resurgence, the economic data and markets in the U.S. did just fine. Consumer confidence was mixed, but in general held up. Business confidence rose. Consumer spending and business investment continued strong. As of this morning, the jobs report came in above expectations, showing that hiring actually increased in July—despite the faster case growth. So while there were some signs of slowing in the economy, the real message from the data was the continued strength of our recovery. And that is what markets reacted to. Despite the rising medical risks, markets expect the economy to keep moving ahead.
Will Economy Continue to Grow in August?
Economic momentum. That note brings us to the prospects for August. The first question we have to ask is whether the economy can continue to grow in the face of higher infection rates. So far, the answer looks to be yes.
During the first part of the pandemic, the primary cause of economic damage was shutdowns that forced businesses to close and lay people off. In many respects, the recession we saw then was a policy recession. At this time, there are reasons to believe we will not see widespread shutdowns. The infection growth is primarily localized in a handful of states with low vaccination rates, so there will be no need to shut down in most of the country. In those states where a shutdown might be helpful, it is politically unlikely. As we saw in the jobs report this morning, an open economy should keep hiring and spending moving forward, at least for a while.
Effect of behavior changes. Furthermore, as demonstrated earlier in the pandemic, people are now starting to change their behaviors in ways that should bring infection growth back down. Vaccination rates have moved higher, and mask wearing and social distancing are on the rise again. As we have seen before, behavior changes can bring the pandemic under control, and that is what we should start to see in August. If we do, expect the economic momentum to continue.
What’s Ahead?
To sum up, July was a terrible month on the medical front, but a good one on the economic and market fronts. In August, the positive economic trends will continue, although we will be looking to see whether the medical news starts to improve—or at least stops getting worse. If the news gets better, we can reasonably expect the positive economic trends to continue through the rest of the year.
Will Rising Medical Risks Derail Positive Economic Trends? - Forbes
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