7D Delta for New Cases Flat, Focus on Structural Tailwind
The decline in daily cases seems to be paused. They have been flat over the past 12 days as you can see below. We suspect that we will likely not see the usual corresponding uptick in hospitalizations and deaths since vaccination penetration of the most vulnerable cohorts has been extensive. Indeed, US hospitalizations are still rolling over as are deaths. US Net Hospitalizations and US Daily Mortality have declined 73.2% and 70.5% since their highs in wave three respectively.
Importantly, the significant progress by the United States in vaccine penetration is starting to make itself shown in the data. Vaccination efforts in Latin America and Europe have been far less effective than those in the United States and you can see the path of new cases is clearly starting to diverge.
Thankfully, progress seems to be forthcoming in both these areas as access to more vaccines seems likely. Remember, our initial efforts didn’t go perfect either. The evidence from Israel is also highly encouraging. Once they reached 26% of their population vaccinated cases began rolling over hard presumably since infected plus vaccinated resulted in R0 collapsing. The United States has just reached that level and progress is continuing at a rapid pace. The US is vaccinating about two and a half million Americans every day and soon the penetration will be great enough where some type of herd immunity will begin kicking in. The US has been vaccinating about 50 people for every new case.
This is the key takeaway for me from our close monitoring of the healthcare situation. The US is vaccinating so many Americans everyday that soon the virus will have no place to go. Israel has proven the vaccination works in essentially eliminating cases. The US is likely on the verge of a significant Israel-style collapse in cases that bodes well for the stock market.
STRATEGY: Buy stocks benefitting from structural tailwinds and the capacity to positively surprise… hint, Epicenter
So far in 2021, stocks have been very challenging and there has been a noticeable change in leadership. Energy is the best performing sector YTD with a gain of approximately 30% while last year’s clear leader, Technology, is down half a percent. We think that four structural factors have contributed the challenges that have plagued stocks in 2021 so far.
- Long-term interest rates are beginning the first real rise (non-Fed) since before the 1980s really
- Inflation expectations are rising, with 5-yr inflation breakevens making one of its fastest ever ascents.
- 2021 Washington is talking about raising taxes, and a seemingly less ‘pro-capitalist’ agenda vs 2020 White House
- US economy is re-opening and we are now in a ‘post-war’ recovery period, not ‘pandemic shutdown’
Each of these reasons alone would be difficult for a fund manager to discount. However, they are all happening simultaneously, and we are just coming out of an exogenous shock that essentially broke many of the predictable cycles. The first two factors have not been part of the investment playbook for a generation, so uncertainty is natural. Perhaps this is why hedge funds are down so far in March when the S&P is up. So, the markets of 2020 versus those of 2021 have completely different playbooks. 2021 winners should be completely different than what worked in 2020. We’ve developed a simple checklist/table
So, as you can see, we think Energy is the sector facing the best tailwinds in 2021. Recall, Goldman Sachs and other commodity teams forecast oil to rally +30% by Summer. This will translate into higher FCF and higher equity prices for the Energy Sector broadly (ETF-XLE), and oilfield services (ETF-OIH).
Lots of market congestion was cleared and position squaring done last week. The VIX closed below $19 today. We have heard clients concerned about a drawdown and equities are extended and overbought and a pullback is possible. However, we think the positive catalysts are stronger and a rally into the end of the first half is more likely. Consider the following positive catalsts; Q1 earnings seasons, improving safety in US from vaccine penetration, markets had good day despite high rates, NASDAQ showing relative strength, and fiscal relief has been delivered to American consumers whose personal balance sheet is the best it’s been in years. On top of this there have been rolling correction in the market. Because many parts of the market have respectively been down more than 10% in the last weeks at different times, we think a market-wide correction in 1H2021 is unlikely.
Figure: Way forward ➜ What changes after COVID-19
Per FSInsight
Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019
