COVID-19 Progress has been mostly positive. Novavax and Johnson & Johnson both made progress on vaccines. AstraZeneca-Oxford’s vaccine was also approved by a European regulator. US daily cases are in a downward trajectory and may fall below 100,000 new cases a day in the next ten days. The ratio of vaccines to new cases is at 9x and could exceed 10x as early as next week. We are happy to report that COVID-19 cases have now been falling for 17 consecutive days. We are now definitely seeing the strongest retreat in cases since Wave 2.

Virus Still Receding, Millennial Investors’ Rising Influence

Despite this positive news, we are still seeing some ‘growing pains’ in the US vaccination process. Moderna and Pfizer’s vaccines are the only ones approved for EUA in the US. Right now, this is contributing to supply-constraints. The Biden administration recently announced that weekly deliveries should reach 10 million doses, higher than the current level of around 8 million. Until more vaccines are approved in the United States, delivered vaccines can be considered a ‘ceiling’ and until that number grows the number of doses is essentially constrained. On Thursday, nearly one and a half million Americans received a dose.

Virus Still Receding, Millennial Investors’ Rising Influence

STRATEGY: 2021 is already proving to be as challenging as 2020… Millennials are structurally changing markets..

2021 is proving to be as challenging as 2020, and the tumultuous trading in heavily shorted stocks is the current “mass extinction” event. In our many zooms with institutional investor clients (so many zooms this week), the obvious question is whether the surge in retail trading is a structural change, or merely transitory. The latter camp believes that the surge is a result of stimulus checks and stay-at-home orders and is a temporary phenomenon. The structural camp thinks that Millennials’ generational preferences will forever and significantly change markets; like their preference to direct their own funds instead of giving them to money managers.

While this is not a ‘this or that’ answer, I believe the rise of retail investors is structural and led by Millennials. Please see my blast from earlier today where I highlighted the e-mail I received from a well-informed source on the issue. In essence, this individual believes the Reddit WSB/Robinhood trading style stems from the Millennial cohort. This is the best educated generation in history, they are thoughtful and cost-conscious, and they have very different habits than their predecessors that have already disrupted other major industries; Airbnb, Uber, Electric Vehicles…. Perhaps now it is the turn of financial markets?

We repeatedly have pointed out that Millennials are set to inherit $68T over the next twenty years, or about 70% of the approximately $100T controlled by US households. Boomers have dominated markets for the last 20 years and naturally, Millennials will dominate the next 20. We’d like to reiterate our thoughts on this change.

Virus Still Receding, Millennial Investors’ Rising Influence

We think the overall impact of this generational shift will be a substantial inflow of at least $6T of investor inflows into equities in the next decade. Of this, $3T is investors taking 10% of capital allocated to bonds over into stock and the other $3T is investors’ savings flow. Remember 94% of inflows went to bonds over equities since 2008. Given that over the past decade total equity inflows were only a mere fraction of what we are predicting at only $180 billion, we are predicting a significant collapse in equity risk premia. We think this process could result in the P/E multiple for the entire S&P 500 rising to a neighborhood of 30x. These projected inflows are so large that they likely cause “all boats to rise.”

Virus Still Receding, Millennial Investors’ Rising Influence

In our January 26th note we noted the similarities between bonds in 2011 and equities in early-2021. Bond valuations in 2011 were at ‘all-time’ lows when looking at historical data. Thus, many investors who thought bond valuations were historically stretched got an unpleasant lesson. Bond shorts got demolished because the market was re-rating bonds; 7.5% was the yield for IG bonds for years and now this is what CCC junk grade is yielding. If stocks are in a similar situation to bonds in 2011, which we think they are, then the P/E ratio of the S&P 500 will likely go far higher than consensus expects. Investors who ‘insanely’ poured their money into bonds trading near ‘all time’ lows were handsomely rewarded. We think those calling valuations ‘extended’ or in bubble-territory are as wrong as people that were bearish on bonds in 2011.

Central banks are dovish. We think generational factors and increased savings will result in equity inflows over the next ten years many factors higher than in the past.

Bottom Line: We think stocks have positive risk/reward in the near term. Our base case remains seeing the S&P 500 reach 3,900-4,000 sometime between Feb and April. We still think this will represent a local top before a large correction ensues.

Figure: Way forward What changes after COVID-19
Per FSInsight

Virus Still Receding, Millennial Investors’ Rising Influence

Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019

Virus Still Receding, Millennial Investors’ Rising Influence

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