Q&A With Gordon Pape: What Will Happen to Blue-Chip Stocks During the 4th Wave?


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Financial expert Gordon Pape answers a reader’s question about the future of blue-chip stocks as the pandemic continues.

Q – Many foresee another “wave” in this pandemic with the Delta virus and the fear of even more serious variants developing. What is that going to do this time to regular blue-chip stocks? – Jennifer W.

A – Stocks (blue-chip and others) have done very well throughout the pandemic, after the market plunged in March 2020 when the seriousness of the coronavirus became apparent. It turned out to be the shortest bear market in history as all North American indexes rallied back to record highs.

There are four major reasons why this happened.

First, central banks slashed interest rates to near zero and reintroduced quantitative easing programs to stimulate the economy.

Second, massive government spending programs provided support for laid-off employees, small businesses, renters, and others affected by the pandemic.

Third, stock markets always look to the future, not the past. Markets rose in anticipation of a recovery that produced higher corporate profits, which has happened.

Finally, low interest rates have reduced real yields on bonds (after accounting for inflation and taxes) to negative territory, leaving stocks as the only profitable option.

As you note, we are now in the fourth wave of the pandemic. How bad will it be and what will be the impact on stocks? Even if it’s as bad as previous waves, which is doubtful because more people are now vaccinated, I doubt we will see the kind of reaction as we did in March 2020. The safety mechanisms I mentioned are still in place and the recovery mentality continues to drive prices higher. Even record new infections in places like Florida and Texas aren’t slowing down the markets.

However, given the strong run the markets have enjoyed, we are likely to experience a slowdown going forward. Prices are high and the components aren’t in place to sustain the recent momentum we’ve enjoyed.

The bottom line is the growth pattern of your blue-chip stocks is likely to slow, no matter what happens. That said, I’d continue to hold them for the long term. – G.P.

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