Raising S&P 500 YE Target to 4,600 (2H +9%) but July likely "choppy" month

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STRATEGY: Raising S&P 500 YE Target to 4,600 (2H +9%) but July likely “choppy” month

Should we be worried about the Delta variant? It is spreading around the world and even causing cases to surge in the UK/Israel and now USA.  We discuss this in our note today, but we don’t think this will lead to renewed calls for lockdowns.  Thus, it is an issue, but not as big a headwind as many might fear.


UK cases are not that far from December 2020 highs…
Cases are rising so rapidly in the UK, that one can see that the number of cases is not that far from the December 2020 highs for UK. 

– fortunately, in UK hospitalizations and deaths are far below December 2020 highs
– case severity of this recent surge might be significantly lower
– time will tell

        


…US cases rising most in states with lower vaccination rates
As for the US, daily cases are inching upwards and it seems that the lower vaccination rates seem to be associated with a larger rise in cases.  Take a look at the deciles analysis below:

– states in the lower 5 deciles of vaccination rates
– have seen the greatest 7D increase in cases

– but even states with high vaccination rates
– are seeing cases rise
– just a lower increase

Tireless Ken and team have compiled the state level changes in cases below:

– states with the highest per capita increase in cases are states with sub-50% vaccination rates
– sole exception is CT, which has a high vaccination rate
– but seeing a notable rise in daily cases

The delta variant is proving to be an obstacle in eliminating COVID-19 from the US.

…we believe “lockdowns” far less probable than “vaccine push”
The natural question for investors is whether the rise in COVID-19 cases both in the US and globally is going to force new lockdowns, particularly in the US.  In our view:

– new US lockdowns are the lowest probability
– but we expect policymakers to make a renewed push for vaccinations
– businesses and corporations like to push harder for vaccinations
– both employees and customers

In other words, we think the US will follow a path towards managing and mitigating COVID-19 but the chances of complete eradication are dimming.  And as policy makers become to appreciate this, a consequence will be that lockdowns will not be pursued as a measure:

– in fact, with vaccination rates rising and showing mitigation
– this seems to be more logical path to pursue

– finding right incentives to encourage greater vaccine penetration


…Singapore Ministers coming to this conclusionTireless Ken recently shared this article from the Straits Times, authored by three senior Ministers in Singapore:

– Minister of Finance
– Minister of Health
– Minister of Trade and Industry

The ministers suggest that COVID-19 is going to become endemic to society. 

– as treatments and vaccinations improve
– healthcare risks to society recede
– this is similar to the policymaker view of influenza which kills millions globally

Singapore vaccination rates are rising and not nearly as high as the US, but their first tool is increasing vaccination rates.  So our takeaway is that more global policymakers are coming to this conclusion.

– it surely beats these abrupt and disruptive lockdowns

..

Source: https://www.straitstimes.com/opinion/living-normally-with-covid-19



STRATEGY: Raising S&P 500 YE Target to 4,600 (2H +9%) but July likely “choppy” month
The S&P 500 is on track to be up ~14% by mid-2021.  As we wrote recently (and is obvious), these gains would be considered impressive for a full year, let alone 6 months.  In fact, since 1928, and ex-recessions (more impressive), this ranks as nearly one of the 10 best ever starts (technically would be #11).

The natural question is what can we expect for 2H2021.  Here is our general thoughts:

– strong markets stay strong –> 2H strong
– economy gaining momentum –> 2H strong
– corporate operating leverage just starting –> EPS beat –> 2H strong
– credit strong and rates stable –> 2H strong
– Fed dovish –> 2H strong
– White House fiscal stimulus –> 2H strong
– Volatility normalizing (vs 2020) –> 2021 gains +23% avg 

There is a litany of reasons to stay constructive.  The only significant risks we see:

– Delta variant –> BUT no lockdowns
– market extended –> July likely brutal (more below)

…Raising FY 2021 S&P 500 target to 4,600
Given the above constellation of factors, we don’t view our FY 2021 target of 4,300 as appropriate.  That is, if 2H is shaping up to be strong, then we should see upside.

– prior target FY2021 4,300 –> +0% upside
– revised target FY2021 4,600 –> +7% upside

Thus, we are raising our FY target to 4,600.

You might recall this chart from our 2021 Outlook.  The context is that we looked at the high levels of VIX and VIX inversion in 2020.  This was one of the most inverted VIX structures ever seen (reflecting high levels of investor anxiety).  This chart looks at:

– forward returns for S&P 500
– following different level of 12-month avg VIX term structure
– 10th decile is most inverted (high volatility regime)

– post ‘high vol’ regimes
– S&P 500 typically rallies an average of 23%

– S&P 500 4,600 is roughly +23%
– in other words, a “textbook recovery”

…History also shows strong markets stay strong
Below tireless Ken and team put together comparative 2H market returns based upon the level of returns in the first half of any year.  Notice a pattern:

– 2H returns are strongest in years when 1H is strongest
– strong markets stay strong
– The median return in 2H is +9% 

…that said, July could be a brutal month
Below are the 12 precedent instances where 1H returns were >13% (ex-recessions).  And we show both:

– July returns
– 2H returns


July returns are actually mostly poor and July returns are worse when 1H is strong:

– July gains +0.4% when 1H >13%
– July gains +1.3% all years

– July win-ratio 50% when 1H >13%
– July win-ratio 59% all years

So July has a lower probability of rising and a lower overall return when 1H is >13%.  This could be seen as a form of market payback.  So we would default to expecting July to be somewhat choppy.

– the caveat is 2Q2021 EPS should be strong –> positive
– will Delta variant headline risk cause selling –> negative

…Epicenter should drive 45% of the points gained in 2H2021, with Energy expected to rise +18%As for sector contribution, we think it is important for FAANG/Technology to do a lot of heavy lifting in 2H2021.  Below is our best guess for sector relative contribution:

– Epicenter                   +125 points
– Energy XLE -0.27%                +21 points
– Technology/FAANG   +111 points

And here is a simple sanity check, should some of these stocks produce better 2H?

– AMZN -0.44%  is +6% YTD
– AAPL 1.74%  is +2% YTD
– V -0.48%  is +4% YTD

If the S&P 500 is up +23% for the full year, shouldn’t some of these stocks have double-digit gains?  If so, then FAANG/Technology will play a big role in the points gained in 2H2021.

BOTTOM LINE: Strong markets stay strongThere is one trading left.  So not sure S&P 500 4,400 is going to happen.  But there is literally no significance in this happening anyways.  The key is S&P 500 saw 1.5% gain in the last 5 days and is basically turning June from a flat month to a strong one. 

Going forward, we see strong 2H gains.  We think leadership from this rally is both Epicenter and FAANG:

– Energy remains our favorite sector, given the positive supply/demand dynamics in oil
– FAANG benefits from the “undershoot” of interest rates, relative to consensus

– we also like Epicenter stocks broadly, and the incoming data this week should be supportive

ADDENDUM: We are attaching the stock lists for our 3 portfolios:
We get several requests to give the updated list for our stock portfolios.  We are including the links here:

– Granny Shots  –>       core stocks, based on 6 thematic/tactical portfolios
– Trifecta epicenter  –> based on the convergence of Quant (tireless Ken), Rauscher (Global strategy), Technicals
– Violence in USA –> companies that are involved in some aspect of home or personal security. We are not “recommending” these stocks, but rather, bringing these stocks to your attention.

Granny Shots:
Full stock list here –> Click here

Trifecta Epicenter (*):
Full stock list here –> Click here

Power Epicenter Trifecta 35 (*):
Full stock list here –> Click here

Violence in USA:
Full stock list here –> Click here

(*) Please note that the stocks rated OW on this list meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile.

POINT 1: Daily COVID-19 cases 13,221, up +2,410 (ex-FL)  vs 7D ago…7D delta has been positive in 5 of the last 6 days…
_____________________________

Current Trends — COVID-19 cases: 
– Daily cases   13,221 vs 12,490 7D ago, up +731
– Daily cases ex-FL   13,221 vs 10,811 7D ago, up +2,410
– 7D positivity rate   2.0% vs 1.9% 7D ago
– Hospitalized patients   13,513 down -3.5% vs 7D ago
– Daily deaths    278,  down -7.3% vs 7D ago
_____________________________

– As we noted previously, Florida stopped publishing daily COVID stats update on 6/4 and we switched to use CDC surveillance data as the substitute. However, as CDC surveillance data is subject to a one to two-day lag, we added a “US ex-FL” in our daily cases and 7D delta sections in order to demonstrate a more comparable COVID development.

– The latest COVID-19 daily cases came in at 13,221, up +2,410 (ex-FL) vs 7D ago. The case figure tends to be higher on Monday as more than half of US states now do not report case stats over the weekend. That said, the +2,410 7D delta is still the highest level we observed since mid-April (the +8k in early June was due to the data distortion caused by Memorial Day). In fact, 7D delta has been positive in 5 of the last 6 days. The spread of the Delta variant within the US is definitely one of the major causes. However, it is still too early to make conclusive prediction on the case trend yet. The daily case figures in this week bear watching. Besides, the daily death is also an important metrics to watch as it gauge the severity of the new Delta variant as well as the effectiveness of the vaccines. 

7D delta in daily cases (ex-FL) has been positive in 5 of the last 6 days…
After being negative for over two months, the 7D delta in daily cases turned positive last Wednesday. In fact, the 7D delta has been positive in 5 of the last 6 days. That said, it is still too early to call a complete reversal in the case trend. The case data in this week is worth watching as it will give us a more accurate view of the case trend. And more importantly, it could tell us whether states with higher vaccine penetration will have proportionally lower cases and COVID-associated deaths.

Current hospitalization, daily deaths and positivity rate are at all time low…
Below we show the aggregate patients who are currently hospitalized due to COVID. After a mini-surge in March, the number of patients currently hospitalized rolls over again. Positivity rate is also following the similar pattern. Currently, all three metrics – current hospitalization, daily deaths and positivity rate – are at their all time lows since the start of the pandemic.

POINT 2: VACCINE: Vaccination pace has stalled…
_____________________________

Current Trends — Vaccinations: 
– avg 0.8 million this past week vs 1.1 million last week
– overall, 46.0% fully vaccinated, 53.7% 1-dose+ received
_____________________________



Vaccination frontier update –> all states now near or above 70% combined penetration (vaccines + infections)
Below we sorted the states by the combined penetration (vaccinations + infections).  As we commented in the past, the key figure is the combined value >60%, which is presumably near herd immunity. We have overlaid our case progress with that of Israel several times to demonstrate what should happen to cases once immunity reaches a certain critical level in the population.  That is, the combined value of infections + vaccinations as % population > 60%. The persistent and rapid decline in cases suggest that the US is following a similar path to Israel (see our prior notes) while nations with less penetration continue to struggle more. 

– Currently, all states are near or above 70% combined penetration
– RI, SD, MA, ND, CT, NJ, DE, NY, IL, UT, MN, NM, NE, AZ, PA are now above 90% combined penetration (vaccines + infections)
– So gradually, the US is getting to that threshold of presumable herd immunity. So long as a vaccine resistant variant doesn’t spread widely, the continued retreat of cases should continue. 

Below is a diffusion chart that shows the % of US states (based on state population) that have reached the combined penetration >60%/70%/80%/90%. As you can see, all states have reached 60% and 70% combined vaccination + infection. 89.4% of US states (based on state population) have seen combined infection & vaccination >80% and 63.1% of US states have seen combined infection & vaccination >90%.  

There were a total of 1,070,208 doses administered reported on Monday. Over the past 7 days, 826,629 doses were administered per day on average, down 26% from 7D ago. The vaccination trend seems improving over the past three days. However, compared to the first half of June, the vaccination pace has slowed. As we noted last week, vaccination penetration currently appears to have some causal relationship with the recent case trend in certain states. Therefore, as the Delta variant spreads across the country and the case trend starts flattening, we expect the incentive rises to get vaccinated. We will be closely watching the relevant data.

95.5% of the US has seen 1-dose penetration >40%… 
To better illustrate the actual footprint of the US vaccination effort, we have a time series showing the percent of the US with at least 35%/40%/45% of its residents fully vaccinated, displayed as the orange line on the chart. Currently, 95.1% of US states have seen 35% of their residents fully vaccinated.   However, when looking at the percentage of the US with at least 40% of its residents fully vaccinated, this figure is 77.8%. And only 59.6% of US (by state population) have seen 45% of its residents fully vaccinated.

– While 95.5% of US states have seen vaccine penetration >40%, 81.9% of them have seen 1 dose penetration >45% and 59.6% of them have seen 1 dose penetration > 50%.
– 95.1% of the US has at least 35% of its residents fully vaccinated, However, only 77.8% of US has fully vaccinated >40% and 59.6% of US has fully vaccinated >45%.

This is the state-by-state data below, showing information for individuals with one dose and two doses.

 
The ratio of vaccinations/ daily confirmed cases is generally trending higher (red line is 7D moving avg), but it has fallen over the past few days due to the stalled vaccination rate.


– the 7D moving average is about ~60 for the past few days
– this means 60 vaccines dosed for every 1 confirmed case

In total, 323 million vaccine doses have been administered across the country. Specifically, 179 million Americans (54% of US population) have received at least 1 dose of the vaccine. And 153 million Americans (46% of US population) are fully vaccinated.

POINT 3: Tracking restrictions lifting and subsequent effects in individual states

Point #3 focuses primarily on tracking the lifting of restrictions, as states have eased the majority of mandates.  Keep in mind, easing/lifting restrictions are contingent upon state of emergency ordinances being renewed. 

– States in groups 1 and 2 represent states that let their emergency ordinances expire, or that never had one in the first place
– Note: IL and HI are not listed. This is because restrictions lifting is determined at the county / island level, and no statewide policy will be established to lift restrictions until a full reopening

So there is a spectrum of approaches.  Our team is listing 3 tiers of states and these are shown below.  

– states that eased all restrictions in 2020: AK, OK, MO, FL, TN
– states that have eased all restrictions in 2021 to now: ND, SD, NE, ID, IA, MT, MS, AZ, SC, WY, TX, GA, AR, KS, WI, IN, AL, UT, NH
– states that are still easing restrictions in 2021: OR, ME, WV, WA, MN, MA, NC, KY, LA, CA, DE, PA, NM, OH, CO, NJ, VT, MD, NV, NY, CT, VA, MI, RI, DC

GROUP 1:  States that lifted restrictions in 2020…
The daily case trends in these states are impressive and it is difficult to say that lifting restrictions has actually caused a new wave of cases because the case trends in these states look like other states.

GROUP 2: States that have lifted restrictions in 2021 to now…
Similar to the list of states above, the daily case trends in these states are impressive and it seems that lifting restrictions hasn’t caused an increase in cases.  

GROUP 3: States that are still easing restrictions in 2021…
These states have begun to lift restrictions, but have yet to ease all restrictions.  The date of each state’s most recent restrictions lifting is indicated on each chart.  The case trends in these states have been mostly positive.

– Easing restrictions appears to have contributed to an increase in cases in several of these states, most drastically in OR, ME, WA, and MN