Economic Delta

Will the aggressive COVID variant impact the economic rebound? Plus, market insights and more.

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On August 16, we sat down with Dominic Nolan, CEO of Pacific Asset Management, to get his insights on market action in July, expectations for Fed tapering, and the effect of the Delta variant on the economy.

We had another case of rates lower and stocks higher in July. What stood out for you?

July was generally good for the markets, with the S&P 500 Index up a couple percentage points. For the year, the S&P is up nearly 18%. It’s been a very strong first seven months for the stock market. For the fourth month in a row, market leadership remained with tech, which was reflected in the Russell 1000 Growth Index being up over 3% in July. In contrast, the Russell 2000 Value Index was down over 3% last month. Over the past three months, the Russell 1000 Growth Index is up ~9% while the Russell 2000 Value Index is negative.

And bonds?

The Bloomberg Barclays U.S. Aggregate Bond Index was up a percent, but still down 50 basis points for the year. Credit is still positive, although with low rates and tightening spreads, we’re in more of a coupon-clipping environment. High yield was up 38 basis points in July, 2% over the past three months, and 4% for the year. Loans were flat, but over the past three months they were up about a percent and for the year up 3.5%. Loans are still outperforming the Bloomberg Barclays U.S. Aggregate Bond Index by a decent margin so far this year.

To sum it up, a classic balanced portfolio (50% in the S&P 500 and 50% in the Bloomberg Barclays U.S. Aggregate Bond Index), was up roughly 9% for the year. I think the root cause of capital-market behavior over the next few months will be the COVID Delta variant and vaccine variables as this is a key determinant of economic behaviors, supply chains and capital markets.

Let’s turn to the Federal Reserve. When do you think the Fed will start talking about tapering and ultimately hike interest rates?

I want to lay out a base case, based largely on comments from Fed Chair Powell and Vice Chair Clarida. Expectations for a rate hike are mid-2023 or early 2023.  I believe for this to happen, the Fed would want to see 2% inflation (which let’s assume we get that given what we’ve seen), and max employment, which still must improve. In my opinion, we won’t get to a rate hike until at least 2023.

But before the rate hike, expectations are the Fed does taper. If we work backwards from assuming a rate hike in early- to mid-2023, that means the Fed could announce in November or December that tapering will begin in first quarter of 2022, which would setup the first hike in 2023.

It looks like some of the sectors most impacted by COVID are showing new signs of stress with the Delta variant. What are you seeing?

In a nutshell, we saw a bit of a slowdown in July. Using Bank of America credit-card data, spending was down about a percent last month relative to June. Compared to two years ago, spending was up almost 15% in June, but only 6% in July. Given how robust the economy is and given we’ve seen inflation tick up, these figures tell you that consumer spending is leveling off.

I do think the COVID Delta variant is a major factor, but I think the slowdown is more of a pause. Why? Because of increasing vaccination rates. Right now, we have about 70% of U.S. adults vaccinated. The goal is to get to 75% by Labor Day. Because of the Delta surge, there’s been some changes in behavior. First doses have leapt from 250,000 a day to ~500,000 a day. It’s not just from fear of the Delta variant. For example, many companies are mandating employees be vaccinated.

Plus, the FDA is expected to give final approval of the vaccines in September, which will give the unvaccinated more confidence in the shots. And FDA emergency-use authorization is also expected by the end of the year for children 5 to 11 years old.

All those elements should push vaccination rates higher, which should also slow down the spread of COVID and ramp up the economy.

Can you give us examples of slowdowns in various sectors last month?

Sure. Compared to 2019 monthly revenue figures, airlines saw a 24% increase in April of this year, a 14% increase in May, a 12% increase in June, but only a 2% increase in July. It’s the same story for lodging—up 10% in April, 5% in May, 8% in June, but only 2% in July.

The consumer is paring back, but spending was still pretty healthy last month compared to July 2019: Furniture is up 32%; restaurants are up 17%; gas is up 11%; and lodging is up 10%. Airlines are down 10%, but again, business travel hasn’t ramped up. Total credit-card spending was up 12% in July compared to July 2019.

We have a possibility of tapering, we have uncertainty over inflation, and we have new COVID cases increasing. With all these variables, where do we see the opportunity in fixed income right now?

The credit story is truly pretty good. I understand that we are seeing a marginal leveling in the economy, but it’s still doing quite well. I found an interesting data point recently to illustrate this. Going back to 2011, there have been an average of 20 loan defaults each year. Last year, because of the pandemic, we had 65 defaults, but the previous three years were 21, 15 and 21 defaults. So far in 2021, we’ve had only four—substantially lower than previous years. Why is that again? A robust economy, very cheap financing and Fed support. Capital markets are currently wide open. I think this sets the tone for a very strong corporate story. Now the flip side: spreads are tightening.

With the corporate story being strong, and, at the same time, inflation being uncertain, it’s still that low-duration credit story, which has been loans. Now, loans have underperformed the past three months. They are up a percent, where investment grade and high yield are both up 2%. But the loan story is, to me, about defensive yield. Defend against rising rates, clip a higher coupon, and stick to a good corporate environment.

Do you have a personal thought to close out our interview?

Yes. In these polarizing times, we need more peacekeepers, which means don’t fire bullets. It’s been very frustrating to see the opposing vaccine narratives. Unfortunately, it’s has been politicized, and many bullets are being fired. Unfortunately, the people caught in the crossfire are those on the frontlines of the pandemic. The nurses, doctors and the first responders are getting hit by these bullets. And it’s been very frustrating and very hard to see.

We’re going to have a new dynamic as schools reopen. The crossfire is going to hit teachers. While the Delta variant surges, you’re asking someone to go into a classroom with 20 to 30 children who are not vaccinated because kids can’t get the vaccine yet. That’s a tough situation that’s bound to tax teachers.

So, for the sake of our doctors, nurse, first responders and now teachers, don’t fire any bullets. They deserve a safe space.


One basis point is equal to 0.01%.

Bloomberg Barclays U.S. Aggregate Bond Index is composed of investment-grade U.S. government bonds, investment-grade corporate bonds, mortgage pass-through securities, and asset-backed securities, and is commonly used to track the performance of U.S. investment-grade bonds.

Duration is often used to measure a bond’s or fund’s sensitivity to interest rates. The longer a fund’s duration, the more sensitive it is to interest-rate risk. The shorter a fund’s duration, the less sensitive it is to interest-rate risk.

High-Yield is represented by Bloomberg Barclays US Corporate High-Yield Index, which measures the USD-denominated, high-yield, fixed-rate corporate bond market.

Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's.

Loans are represented by Credit Suisse Leveraged Loan Index, which is designed to mirror the investable universe of the U.S. senior secure credit (leveraged loan)market.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-value ratios and higher forecasted growth values.

The Russell 2000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell1000 companies with lower price-to-book ratios and lower expected growth values.

The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.

You cannot invest directly into an index.

Pacific Asset Management LLC is the sub-adviser for the Pacific Funds℠ Fixed Income Funds. The views in this commentary are as of August 15, 2021 and are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector or index, or to predict performance of any investment. The opinions expressed herein are subject to change without notice as market and other conditions warrant. Any performance data quoted represents past performance which does not guarantee future results. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. Sector names in this commentary are provided by the Funds’ portfolio managers and could be different if provided by a third party.

Past performance does not guarantee future results. All investing involves risks including the possible loss of the principal amount invested. High-yield/high-risk bonds (“junk bonds”) and floating-rate loans (usually rated below investment grade) have greater risk of default than higher-rated securities/higher-quality bonds that may have a lower yield. Corporate bonds are subject to issuer risk in that their value may decline for reasons directly related to the issuer of the security.

Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Investors should consider a fund’s investment goal, risks, charges, and expenses carefully before investing. The prospectus and/or summary prospectus contains this and other information and should be read carefully before investing. The prospectus can be obtained by visiting

Pacific Funds and Pacific Asset Management LLC are registered service marks of Pacific Life Insurance Company (“Pacific Life”). S&P is a registered trademark of Standard & Poor’s Financial Services LLC. All third-party trademarks referenced by Pacific Life, such as S&P, belong to their respective owners. References of third-party trademarks do not indicate or signify any relationship, sponsorship or endorsement between Pacific Life and the owners of referenced trademarks.

Pacific Funds are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA), and are available through licensed third parties. Pacific Funds refers to Pacific Funds Series Trust.

Index performance is not indicative of fund performance. For performance data current to the most recent month-end, call Pacific Funds at (800) 722-2333 or go to

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