The Delta Variant Investment Thesis For Stocks And Real Estate

If the delta variant is here to stay, we should come up with an investment thesis to navigate new choppy waters.

After all, the first rule of financial independence is to never lose money. The second rule of financial independence is to never forget the first rule.

It would be a damn shame if we gave up all our gains and then some because the delta variant returns the country back to the stone age!

What’s Currently Going On With The Delta Variant

According to Johns Hopkins data, an average of 32,387 new coronavirus cases was reported each day over the past week — more than double what the seven-day average was 10 days earlier.

As a result, hospitalizations due to the virus have also increased by about 36% between July 7 and 13 compared to the previous seven days, according to Centers for Disease Control and Prevention data. Deaths from the virus also rose 25 percent last week.

Meanwhile, only about 48 percent of the U.S. population is fully vaccinated and roughly 56 percent has gotten at least one shot, according to the CDC.

Given COVID-19 vaccines have been fully available to the entire population for many months, it appears unlikely America will ever reach herd immunity.

Therefore, there’s little we can do about it except to perhaps live where we feel is safest, act according to our risk tolerance, and wait for an as yet undiscovered solution. 

Meanwhile, what will the investment environment be like if the delta variant results in an extended surge of new COVID-19 cases? Let’s discuss!

Overall Delta Variant Investment Thesis: Won’t Be As Bad

Thanks to our experience since 1Q2020 dealing with earlier variants, we now have a decent roadmap for what to expect. Therefore, if there is another sustained surge, we can expect less safety compliance, less fear, and more economic activity.

In other words, things won’t get as bad this time around. Therefore, we can rule out another 32% S&P 500 correction like the one we saw in March 2020.

However, we could easily see a 10% – 15% S&P 500 correction that would bring the index back down to 3,7,00 – 3,900. Valuations are expensive and corporations must grow earnings to meet high expectations.

As for real estate, the delta variant should be good for real estate as more people spend more time at home again. Interest rates will likely decline as Treasury bonds get bid up. Further, more people will try and convert more paper money profits into hard assets.

Let’s get into more detail.

Delta Variant Investment Thesis: Stocks

Since none of us have future-revealing crystal balls, we must accept our delta variant investment thesis could be dead wrong. However, if we logically think things through, hopefully, we’ll have a greater than a 50% chance our investment thesis will be right.

When it comes to building wealth, our net worth allocation is the biggest determining factor. However, when it comes to active investing, all we need is enough 51% chances to outperform.

Again, expect the S&P 500 to decline by 10% – 15% if the delta variant rages as much as the alpha variant. After the correction, we can assume new booster shots will target the delta variant and things will more quickly get back to normal.

Therefore, if there is a 10% – 15% correction in the S&P 500, I would be aggressively buying the dip. I expect the S&P 500 to recover all its losses within three months of the correction and the market to reach new highs.

Outperformers In A Delta Variant Scenario

During the worst of the delta variant spread, these sectors/stocks may perform the best.

  • Home media: Netflix, Disney, Hulu, Roku
  • Food delivery: DoorDash, Postmates, HelloFresh
  • Home furnishing/remodeling: Wayfair, Home Depot
  • Home fitness: Peloton
  • REITs, eREITs, real estate ETFs: Vanguard Real Estate, American Homes 4 Rent, Realty Income
  • Social media: Twitter, Snapchat, Facebook
  • Big tech: Apple, Google, Amazon, Microsoft
  • Pharma: Pfizer, Moderna

Underperformers In A Delta Variant Surge

During the worst of the delta variant spread, these sectors/stocks will likely underperform the S&P 500. If there is a delta variant booster shot or if the variant starts to get under control, there’s a greater chance these sectors/stocks will then begin to outperform.

  • Financial (XLF): JP Morgan, Chase, Wells Fargo
  • Materials (XLB): Newmont Corp, Dow Inc, Linde PLC
  • Industrials (XLI): Honeywell, UPS, Union Pacific, Boeing
  • Cruises & Airlines: Delta Airlines, Norwegian Cruise Lines, Carnival Corp
  • Small-Cap Russell 2000: Plug Power, Novanax, Penn National Gaming, Caesars Entertainment

Delta Variant Investment Thesis: Real Estate

The delta variant makes me bullish on real estate due to a decline in interest rates, an increased desire to own hard assets, and more time spent at home. Whenever you spend more time using something, its intrinsic value goes up.

One of the reasons why I’ve been seeing more online search traffic tick up about migrating to California and Hawaii is due to higher vaccination rates. The combination of a better lifestyle, more job opportunities, better weather, and higher vaccination rates is alluring to some people.

Therefore, if the delta variant becomes a beast, there will at least likely be a slowdown of people migrating to the Midwest and South to save money.

Below is a map of the latest risk levels by state.

Underperforming States During A Delta Variant Surge

  • Arkansas
  • Louisiana
  • Florida
  • Mississippi
  • Alabama
  • Kansas
  • Oklahoma
  • Wyoming
  • Nevada
  • Utah
  • Arizona

Most of these states either have lower vaccination rates, more liberal mask and social distancing mandates, unhealthier people, or a combination of all items.

Therefore, at the margin, these states may be relative underperformers from a real estate investment standpoint as investors avoid these states until things get better. If enough hospitalizations and deaths occur, economic activity will slow down.

On the flip side, more individual liberties may result in more economic activity, which could boost real estate prices further. I’m hypothesizing that enough people have died from the coronavirus that people in the most affected states will take things more seriously this time around.

Unfortunately, I don’t see the southeastern states like Mississippi, Alabama, and Arkansas climbing out of the bottom 10% poorest states in the country any time soon. Cultural and structural differences take time to change.

Percentage of Americans fully vaccinated by state

Outperforming States During A Delta Variant Surge

Given all of us have already gone through 1.5+ years of a pandemic, at the margin, we should be more comfortable living with this disease. Therefore, I don’t see as many people fleeing big cities like San Francisco, New York, and Boston as much this time around. Safety protocols are robust in these cities.

The midwestern and southern states have had their time to outperform during previous variants. As a result, I see a normalization of real estate price increases where the fastest growing cities slow down and the slowest growing cities stay the same or increase.

Check out this Burns Home Value Index chart highlighting May 2021 YoY price increases. If you read my heartland real estate investment thesis piece from 2016 and took action, you are now well in the money owning Austin, Dallas, and San Antonio property.

It is highly unlikely cities like Austin will see a similar level of price growth under a delta variant scenario. House price growth cannot outstrip income growth by that much for too long.

Instead, I expect to see the above graph look more uniform around the overall United States real estate price growth figure. In other words, big cities will underperform less. Price growth for 18-hour cities will slow.

Big Cities Will Underperform Less

Due to high cost, I don’t think real estate prices in cities like New York and San Francisco will outperform 18-hour cities like Charlotte or Charleston for a while. The “spreading out of America” is a permanent trend. The law of large numbers is also hard to overcome.

However, don’t feel sorry for residents in higher-cost cities. Even a 10% price increase on a $2 million home is equivalent to a 40% increase on a $500,000 home. The main difference may be that big city residents also have higher incomes and a larger public investment portfolios.

If larger public investment portfolios so happen to be concentrated in sectors that outperform, then the wealth gains can be enormous. I know plenty of people who became millionaires and multi-millionaires in the San Francisco Bay Area after the NASDAQ closed up 43% in 2020.

One guy I know joined a San Francisco startup called Figma two years ago when it was valued at $500 million. Recently, the company raised a $100 million round that valued the company at $10 billion! He is now a deca-millionaire on paper.

Although big city real estate will underperform less, they will likely still underperform. Therefore, it’s up to you to take in all the variables of lifestyle, income, family, and friends to decide where you want to live.

Personally, I’ve used part of my Buy Utility, Rent Luxury (BURL) strategy to invest. In other words, I have continued to live in an expensive city like San Francisco for lifestyle reasons and invest in less expensive cities like Charleston for capital gains reasons.

My Invest Strategy If Things Get Worse

If the delta variant aggressively spreads, bonds will do well and yields will decline. Therefore, I’m happy to keep my existing bond positions and will focus on putting new money to work in real estate.

In my post, Why The Housing Market Won’t Crash Any Time Soon, one of the bullish housing scenarios I discussed was a bear market in stocks resulting in a bull market in bonds and a decline in rates.

We saw this mini-scenario play out on July 19 when the S&P 500 declined by 1.2% and bond yields declined to 1.18% from 1.3%. We saw this scenario play out for years after the 2000 dotcom bust.

If the delta variant doesn’t ravage the economy, then strong economic growth will do well for stocks and real estate. Bonds may underperform. However, bonds have done incredibly well in a multi-decade stock bull market. Therefore, don’t completely disregard bonds just because interest rates are low.

Bonds versus stocks

I’m investing in a build-to-rent fund because I believe rents will continue to go up. I don’t currently have enough capital to buy another physical rental property, nor am I sure I want to given time constraints as a father.

My current real estate exposure consists of three rental properties in San Francisco, a rental property in Lake Tahoe, 14 real estate crowdfunding investments, and various real estate public securities. These investments make up roughly 40% of my net worth.

Buying Stock Underperformers

On the stock side, my focus is squarely on the sectors and names in the Underperformers category. The reason why is because I’m already long names in the Outperformers category (tech, media), which have underperformed so far this year after outperforming in 2020.

JETS, RCL, CCL, and XLB are the main securities on my buy list. Airlines and cruise ships have up to 30% downside from current levels if the delta variant shuts us down. If these stocks do decline by this magnitude, eventually I believe they will recover by 50%+.

It’s important to develop a watch list because, otherwise, you’ll tend to buy what you’ve always been buying. For example, after the S&P 500 declined by ~2.6% in just two days on July 18 and 19, I decided to hold my nose and buy $21,281.75 of IVV, an S&P 500 ETF for one of my accounts on July 19.

However, if I had come up with my watch list before that day, I would have probably bought one of the names and done much better so far.

Delta variant investment thesis for stocks - buying stocks on July 19, 2021

Given I believe there will be booster shots to counteract new variants, I expect the Underperformers to eventually outperform again. My biggest investing mistake this year was not rotating out of tech and into banks, industrials, and transportation stocks.

Finally, I am happily stacking cash in order to take advantage of a potential 10% – 15% decline in the S&P 500. I only assign a 25% chance such a magnitude of decline will happen. However, I still want to have a decent amount of cash to deploy if it does.

Having a robust investment portfolio and a large cash hoard feels good after a massive rally. Let’s hope things don’t get too bad! But if they do, now I’ve got a plan.

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Readers, what is your delta variant investment thesis? What are you waiting to buy if things start getting very bad again? Are you putting more capital to work in real estate or stocks? Or are you buying something else or hoarding cash?

Disclaimer: I’ve written my investment thesis and what I plan to do with my money. Given you are not me, please write your own investment thesis and follow your own objectives. Invest at your own risk.

The Delta Variant Investment Thesis For Stocks And Real Estate is written by Financial Samurai for

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