The Delta variant has increased the spread of Covid-19 leading to some areas reinstating mask requirements. This newest wave of the pandemic has also caused concerns as to whether people will travel less and has even raised fears that there may be a new round of shutdowns and lockdowns.

Investors have generally been wary of the potential impact of the uptick in Covid infections and that was at least partly responsible for a down week in the stock market. The pandemic, however, is not the full story and Maxx Chatsko joined Dan Kline for the August 18 7investing Now to look at what’s actually happening and what we should be watching for going forward.

A full transcript follows the video.

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Dan Kline: We are going to talk will the Delta variant slow the bull market, we had a bit of a rough day in the stock market yesterday. But it is important to remember that US stocks hit record highs Monday. I know that’s hard to remember, I’m in Vegas. So remember, remembering things is not that easy. But we went way back to Monday to hit record highs. And then yesterday, all the major indexes dropped about 1%. Maxx, let’s talk about why the news reported that happened. And then we can get into the reality of what maybe actually happened.

Maxx Chatsko  2:30:  Yeah, so last, what was it yesterday, a whole 24 hours ago, Dan the news that came out anyway was that retail sales in July dropped 1.1% compared to June. And that was way more than expected. And so everybody got spooked. And then all the headlines said, well, the futures are down early in the morning. So this must be the reason. So as we talked about a little bit on Twitter spaces, you’ve worked in the media for a long time. You know how there’s that pressure to get content out and try to form these narratives. And I think we could both baby say that sometimes journalists fit data to the narrative they want, even if they’re conflicting on opposite ends of the spectrum.

Dan Kline  3:13:  Yeah, so so let me jump in here. And by the way, we would like your questions and comments. So wherever you’re watching this, if there is a comment field, if you type it in, you can ask us questions about the markets, questions about stocks, we’re going to talk for a while on this segment, then we have a taped interview with our friend The Science of Hitting, and then we will come back we’ll take more of your questions and comments. So feel free to weigh in wherever you are.

But yeah, so what happened yesterday is the lead story was that consumer sales, that’s retail and cars basically had fallen by 1.1%. And there is the supposition that that drop in sales caused the stock market drop. But that’s a very big leap to make because falling 1.1% from record highs really doesn’t mean that much and Maxx, there’s also a little bit of a curveball in the data that I know you like to point out.

Maxx Chatsko  4:03:  Yeah, so if you include automobile sales, right, so those were there were more sales in June than in July, because of the shortage of automobiles, then retail sales only fell 0.4% in July, compared to June. Now there was still a pretty decent drop in things like clothing sales, I don’t know what that might have been caused by. But again, it’s like this wasn’t really that big of a deal necessarily. And Sam we’re gonna go a little bit out of order. There is a second graphic maybe about the historical —

There we go. So look, it fell compared to June. But look at where we’re at. We’re still way ahead of pre-pandemic levels. So the fact like did this actually cause the market to tumble? And by tumble, I mean, a whole 1% drop? Oh, no. Maybe not. Now, he could also say that maybe the markets a little elevated, it doesn’t take much to maybe give it a little nudge and have it have a 1% down day. But I guess I would say I’d be cautious about to pinpoint exactly why the market fell to any one story.

Dan Kline  5:05:  Yeah, let me talk about being a newspaper editor or being in the media, you have to answer questions whether you have the answer or not. So you basically have to say, Okay, this consumer data came out, and oh, my God, it’s a drop, it’s bad, or the week before, just a few days before, we added 943,000 jobs to the economy, and that sent the stock market in the green in the positive direction. But here’s the reality, if you actually take a step back and look at unemployment, we have dramatically more job openings than we have people to fill those job openings. So the creation of new jobs is just numbers. It doesn’t mean anything.

And what’s the nuance? Are those jobs flipping burgers at fast food places? Or do we need new highly trained physicians, or robot techs or whatever it might be? So just those numbers, I mean, look, we’re at a 5.4% unemployment rate. But we’re probably at pretty close to full available employment. Well, what does that mean? Well, most people who want a job likely have a job, why do you not want a job? Well, you might have childcare issues, because your daycare hasn’t reopened, you might have health care issues, because your grandmother has COVID, or whatever it might be. So the market is affected in the short term by news.

And as a newspaper editor, as a website editor, you have to generate that news. So the guy working at CNN or CNBC, or, or Fox Business, wherever it might be, has to go, Okay, this data came out. What does that data mean? But it doesn’t necessarily mean that like, my concern on this data, and Maxx you could weigh in, is that we’re headed back to school. And we had forecasts the National Retail Federation had forecast record back to school sales. And when you see drops and things like clothing after a year where kids only wear sweatpants and T-shirt, that does suggest to me that there is a little bit of consumer wariness. And I think that’s about sort of, we don’t know where the current wave of the Coronavirus is going to go. So I’ve talked too much Feel free to jump in here.

Maxx Chatsko  7:07:  Yeah, and one thing that stood out to me in the data was what you said, We’re going back to school, or we are about to, right. So the fact that apparel sales fell was kind of interesting compared to June anyway, right. So it would be important to remember that it’s relative to June, but also interesting. I mean, in July was the first month that the child tax credit payments started getting mailed out.

I don’t have kids, but it’s like $250 to $300 per child per month, those are gonna go out again, are already have started going out in August. So I mean, I would expect that money to maybe be used to back-to-school things, hopefully. So maybe in the data we get from August, maybe it’s a little bit higher than July. But again, we are still way above pre-pandemic levels. So I think I’d be careful about drawing too many conclusions in the month-to-month volatility. We’re also in like, we’re in the recovery, which has no really historical precedent. So it’s hard to really draw too many conclusions. I think.

Dan Kline  8:05:  So, Rahul, we will get to your question a little later on, Aleksino yes, good afternoon, we appreciate you watching the program. But that with Maxx, you shared a tweet. And I think this really pinpoints sort of how people are thinking about the market. And the reality is what happens on a day to day basis doesn’t matter. And Sam, if you want to share that tweet, I’ll let Maxx read along.

Maxx Chatsko  8:28:  So I had a funny Tweet because then this kind of goes with the narratives that media come up with, right? So if you if you wake up early enough, and you read articles, like on the Wall Street Journal, they’ll look at a futures data, which has been out for 26 minutes at that point in time. And maybe it’s down though the s&p 500, down 0.5%. And then they try to, they try to tie it into the story of the day or so maybe it’s unemployment data is down.

And they say, Oh, well, stocks are falling based on unemployment data. But then if you check back an hour later, maybe stock futures are up 0.3%. And then they keep the same headline, they just flipped what it means. So they’ll say, oh, stocks shrugged off unemployment, and they’re up. And so it’s like, you could tell it doesn’t really mean anything, we kind of fit the data to the air. So this is a funny tweet. It just said based on all these other opposite outcomes, stocks are gonna rise no matter what. And that was kind of just my funny take on maybe a little bit of how the media works in the moment, right, a lot of it is the noise, not the signal.

Dan Kline  9:23:  So Maxx, we talked a lot about sort of the short term news but is the real fear here, that there’s gonna be another round of lockdowns and restrictions. I know that you know, I’m in Las Vegas, and I was when I was here in March, you pretty strictly had to wear a mask, you’re gonna have to wear one at the pool, except when you were in the pool. Now you’re supposed to wear a mask inside. It’s not being particularly well enforced. That being said, you can also see that it’s not particularly crowded here and it’s August and it’s 108 degrees.

So I’m not projecting that this is necessarily a time where Vegas should be crowded, but it is the this week’s call it stock market fear And the market is down a little bit today as well, at least it was when we started the show. Is it really just this uncertainty? We’re like, teach, maybe I’m not so sure that that September trip to Walt Disney World is a great idea. Or maybe I’m just gonna not go to the mall today and, and hold back a little bit just because I’m not entirely sure, especially with people who have kids who are too young to be vaccinated.

Maxx Chatsko  10:22:  Yeah, I think that’s a good point. I think the ferocity of this wave and I wasn’t even you hear about the Delta variant, right. And it’s kind of in the news a lot. I hadn’t even really checked the data, compared to like, when we started tracking COVID cases. So I checked it the other day, we were talking about this before the show, this current wave is probably gonna be the biggest wave we’ve had in terms of the known cases that we’re going to be able to identify. That’s pretty shocking to me. So the Delta variant is highly transmissible. It does seem to result in more severe infections, were very lucky, this wasn’t the first strain that came out before we had half of our population fully vaccinated. So that is surprising.

That does add quite a bit of uncertainty, as you said, and one of the big reasons that a lot of half the population isn’t vaccinated, you know, we’d like to kind of talk about the political angle to it. But kids under 12, currently, there’s they cannot be vaccinated, right? It’s coming soon. But those kids are going to school, bringing a bunch of children that live around a building into the same building every day, and then sending them back home and then doing that five days a week, that’s a really good way to light a fire under a pandemic that’s still burning. So maybe we might want to rethink that.

As you’ve said, you were talking about this, people, mostly with children are maybe being a little more cautious about their their summer plans, their fall plans. And maybe that’s more of what we’ll see in terms of like, any hit to the economy, however small, I don’t think we’re gonna have lockdowns again. But that could probably restrict certain activities, Dan.

Dan Kline  11:54:  Yeah. So I mentioned what the conditions are like in Vegas, I will say that Disney World has reinstated indoor mask-wearing. And I think it’s possible. But if you have young kids, you kind of don’t want to spend $5,000, or whatever you’re going to spend on a Disney vacation, come stay at my place. It’s cheaper than that. But you don’t want to spend that kind of money to have a vacation. That’s not 100%, it might be as simple as they haven’t brought back character meet and greets. And if you have a child under five, getting your picture taken with Winnie the Pooh is a big part of the experience. So if you can’t have that, it might not be worth it to spend that money.

So a lot of this is sort of related to what’s going on. But some of it might just be experiential, where it’s like, yeah, I could do this. But why do this now, like, Look, we don’t eat out as often as we used to. And that’s not because like, I’m afraid to go out, obviously, I’m away, I’ve been on a plane, it’s just that there’s an added layer of hassle with mask-wearing and other things you need to do that make it just, hey, let’s order in and eat at the kitchen table.

Maxx, you’re concerned that we’re in a stock market bubble, I take a different approach, I think there are a lot of stocks that have got ahead of themselves in valuation. But I’m not overly concerned if say, a Teladoc, or a Zoom drops by 50%, and then takes 10 years to get back to where it was. Because I think that’s maybe a more realistic growth picture for how it should have gotten. What do you mean, when you say a bubble? Do you expect like we’re gonna see 50% of the market disappear overnight?

Maxx Chatsko  13:26:  No, I don’t necessarily mean that. So I just read about this for 7investing members, actually. But when we talk about stock market bubbles, or real estate bubbles, we often focus on prices. And that makes sense, right? The stock market is about numbers. So quantitative analysis has a big role to play. But if we look back at the history of stock market bubbles, right, we see that some of the defining features are actually tied to human psychology, and also the narratives that we tell ourselves about the economy at the time or innovation at the time. And if you have that historical perspective, you can go down the checklist, sure, valuations are stretched, and a lot of parts of the market even for the overall market.

But also a lot of those human psychology factors are present as well. So there’s a surge of new investors coming into the market, which is good, we love that here at 7Investing, we want everyone to be investing in their future. But also, there’s a lot of people who may be get a little greedy here about your idiot neighbor who’s making a bunch of money and you’re like, this guy’s a bomb, I could be doing better than him. And then I’m gonna put my money in the stock market, and then for 12 months or 24 months, or however long it goes, it seems easy. Everybody’s making money. Woo!

And but history suggests, eventually, the bill does come to fundamentals do matter. Momentum is not a durable advantage. So if you’re interested in these topics, and I think these are this is some of the things that economists kind of shrug this off right, because they’ll point to this data point and that data point and what about unemployment and this This time, it’s different Don’t worry about it. What about innovation this that and we see all the same argue In other bubbles, right, whether it’s the.com bubble, or in the 1980s, or Japanese stocks, or going back in history, any other bubble you want to look at, but I would encourage you to read some of Robert Schiller’s books.

So he wrote Irrational Exuberance. Great book, it’s the third edition is the most recent, very good. He explains a lot of these factors. So he talks about in any bubble, there’s precipitating factors. So that kind of lays the groundwork, right, and a lot of these kind of plug into human psychology. And that sets the stage for a bubble to form. And then there’s these amplifying mechanisms, right. So more people coming in different narratives in the media, an explosion of talking about the financial markets within the media at large. And he’s kind of just inflate and blow up the bubble a little bit.

So he talks about all these and how they tie together, he admits that there’s really, it’s tough to map these perfectly on to some of those quantitative metrics that we we like to follow like price to earnings ratios, or price to sales ratios, or the Shiller P/E ratio, which is named for him. But he does make a pretty good case that, here’s this checklist. These are what we tend to how we define bubbles. And I think if you go through that checklist, right now, you can make a pretty strong case, we’re in a stock market bubble.

He also wrote a book I think it published in last fall called Narrative Economics. So it talks a little bit more about that. Not just that the economic state of the time, sets certain narrative that creates narratives, also that narratives create certain economic reality. So pretty interesting book as well. So definitely read those. I talked a little bit long there.

Dan Kline  16:40:  So you I want to draw some lines between the dot com bubble because I think a lot of people look and say, Oh, my God, we’ve got high flying tech stocks. And high-flying tech stocks eventually crash, because that’s what happened during the dot com bubble, there is a very big difference here. You might argue I mentioned two before Zoom and Teladoc. You might argue that their valuations are ridiculous that they’re very high based on P/E ratios that they should come down.

That is very different than companies in the late 90s that had no revenue, and were worth billions and billions of dollars that had no clear path to ever being profitable. We didn’t foresee the cloud. In those days, I was a dot com pioneer, I worked at a an early publicly-traded company that spent 10s of millions of dollars a year and took in 10s of hundreds of dollars a year in advertising. Every server we bought physical server was decliningly efficient in terms of running our website and our games and the things we were doing.

So there are some differences. And you might say there’s a lot of stretched valuations. But I could say pretty clearly that Zoom and Teladoc aren’t gonna go out of business. And I can tell you in 1999, or 2000, I could look at 99 out of 100 companies and tell you that they were gonna go out of business, and I was I was wrong, because it was 100 out of 100. In most cases, Maxx, feel free to jump in.

Maxx Chatsko  18:01:  Yes. So you’re right. And I actually push back when people make the we always compare everything to the dot com bubble. And I think there’s maybe some parts of this market that have very strong parallels to the dot com bubble. But there’s also other bubbles, like maybe in Japan, the Japanese bubble in Japanese tech stocks in the 80s seems a little bit more reminiscent of what’s going on now. So those comparisons to any specific bubble usually fall apart pretty quickly, because every bubbles a little bit different. But those basic elements are still present, right?

You might talk about Zoom and Teladoc having staying power, and they’re gonna be fine in the long run. And I would agree. But those same arguments were made, like you said in the dot com bubble, right? For every amazon.com that emerged because of the information superhighway was going to revolutionize the economy. There was 100 pets coms, right? So you do have to be kind of careful. And I see that going on right now.

Especially in the markets, the parts of the market that I cover, which are drug development, and renewable energy and synthetic biology. There’s a lot of people saying, well, this time is different man, like, look at the pandemic, we came up with a vaccine in a year less. This is the golden age of biotech, synthetic biology is the fourth industrial revolution. And the reality is, you’re probably right in the long run. But man, I see a lot of pets.com out there right now, a lot of companies that have really high valuations and sometimes no clinical data, they’re just kind of trading on this narrative, or this idea that this time is different. It’s exactly what happened in the.com bubble for tech stocks.

Dan Kline  19:36:  Yeah, people love their narrative. If you try to talk someone off a narrative and we saw this recently with Cannabis Stocks, cannabis is going to be legal everywhere. All these companies are going to be valuable. Here’s the reality. cannabis is a commodity. It’s hard to stand out and be different as a cannabis company. So the vast majority of people that invested on that narrative have lost a ton of money. Well, we’re hearing the same narrative with everything from plant based meat, you can make a case for beyond meat, you can also make a case that it’s a commodity that’s easy to duplicate. We’re seeing it with sports betting, which I absolutely think is going to be a a commodity.

That doesn’t mean there won’t be winners, there can be differentiated companies, there are a couple of winners in cannabis. But there’s gonna be a lot of failures because people buy the narrative, oh, my God, this segment is going to be huge. And they don’t know how to connect that. You know what’s huge? Retail is huge. That doesn’t mean Sears is doing great. Like, there’s There are stories to be told here.

I want to get to a comment from Rahul, Rahul Gauti, which is going to touch off an area we were going to talk about anyway. So Sam, if you want to share the one along with Dell, along with Delta, lots of chatter about fed tapering, is that a big deal? I was gonna ask Maxx about this and basically say, if sales slow down, and we actually have some negative months in terms of some of the consumer retail data, does that actually sort of give the Fed reason to not taper. So in the negative? Is there actually sort of a positive here?

Maxx Chatsko  21:06:  Yeah, well, that’s like when, when that was the narrative yesterday, right? consumer sales fell 1.1% from June, the stock market’s down. So well, if you take a step back, that’s probably great news for the stock market, because that means the Fed is going to keep the pumps running for longer, right? it’s going to keep trying to stimulate economic activity if we get bad economic data. So right there that shows that maybe some of those headlines aren’t really very well thought out.

But yeah, and this is the thing like so with the stock market valuations stretched, and maybe there’s just different pockets that are stretched. I think you could say, a lot of valuations are kind of priced for perfection. So it doesn’t take much maybe it’s worrisome data about consumer sales, unemployment data, the Delta variant, maybe it’s talking about when is the Fed gonna start tapering or start raising interest rates, any of those stories, it doesn’t take much of a push, maybe for the stock market to kind of even introduced a little mini correction, maybe it’s just has a few months, where it’s kind of starting to lose a little bit of value, maybe it just goes sideways for the rest of the year, the stock market, the s&p 500 is up 18% since the beginning of the year, that’s kind of a bonkers annual gain. And it’s only what eight and a half months in. So if you have a little historical perspective, I mean you have to appreciate that a 1% drop or a 5% drop, or even a 10% drop isn’t really that surprising. In the greater context.

Dan Kline  22:28:  It’s really important to remember that short-term news is just that we don’t change our thesis, because it rained and Disney World had a bad day like that doesn’t change your thesis on Disney. If If a restaurant couldn’t get in its most popular dish couldn’t get the shrimp it needs to make its famous shrimp scampi. And thereby some people cancel their reservation. sure if that happens every day for three months, it’s probably going to have a negative trend. If it happens once you’re probably going to shrug it off

I had breakfast yesterday at a restaurant owned by a big Food Network personality. I’m not going to attempt it. I believe it’s her last name. And the service was really bad if I go back today, and the service is also bad. That might make me think, geez, I don’t want to have breakfast here. But the reality is there were a couple of trade shows and it’s right at the foot of the conference space. And maybe it was just overwhelmed. And maybe that’s the first time since the pandemic that they’ve had a large crowd and they didn’t plan for it. They didn’t staff for it. I’m not going to write it off because of one bad day. It’s okay, close that restaurant. I think it’s really important.

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