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STRATEGY: Germany policymakers panic, but it is too early for financial markets to panic. Wait until “google search trends” panic
Germany policymakers panic, but it is too early for financial markets to panic (see below)
Germany implemented new restrictions for indoor capacity, following a record surge in COVID-19 cases:
– capacity is limited in restaurants, cinemas, museums, concert venues
– daily cases per 100,000 residents surged to 303
– this is a record figure
![Germany policymakers panic, but it is too early for financial markets to panic. Wait until google search trends panic](https://cdn.fsinsight.com/wp-content/uploads/2021/11/imagehandler-TnFFRH.png)
…Parabolic surge in cases in Netherlands and Greece as well
There is also a parabolic surge in cases elsewhere in Europe. As shown below, Netherlands and Greece are also seeing an all-time surge in new COVID-19 daily cases. The delta variant is the primary culprit:
– but UK and Sweden are on the other side of this surge
– Delta variant is highly contagious
– but it is moves through a community faster
– thus, it leads to an eventual peak
So we don’t necessarily view this as a reason to panic. Moreover, below, we take a look at the USA Summer Wave 3 surge and compare this to when markets finally panicked.
…S&P 500 did not panic until the “public freaked out” measured via Google search trends
Cases are rising in the US, as we noted over the past few weeks. And this is due to the delta variant and winter weather hitting the northern states. And naturally, the question is when should investors start to worry that financial markets will panic. Well, take a look at Wave 3 below:
– US COVID-19 cases started rising July 7, 2021 (based on 7D moving average)
– S&P 500 had a modest blip, but continued to rise through September 2
– Cases rose for 8 weeks before markets actually started to wobble
– Google search trends show “delta variant” searches peaked in early August
– Recall, it was in August that anecdotes about cancelled travel plans became apparent
– Airlines even cut forward guidance around early September
– that is when financial markets panic
So you see the sequence?
– cases rise
– media coverage surges
– consumers panic
– cancel plans
– “alternative data” show weakness
– companies cut guidance
– stocks fall
So, this was the sequence. It doesn’t mean this is how it will sequence in this coming wave 4. But this is something to be mindful of. And we don’t see this happening before year-end. We could be wrong, however, but that is not our base case.
STRATEGY: 2021 is tracking precedent 1H> 13% year “seasonals” closely –> implies S&P 500 4,850 before YE
Rising COVID-19 cases = Fed errs on side of “dovish” = supports YE everything rally
I wanted to make a point of clarification. Several of our clients were wondering how the recent rise in COVID-19 cases would impact our view on equities into YE. And for the moment, we believe the recent rise in cases actually strengthens the case for stocks to rally into YE:
– rise in cases means Fed needs to err on the “dovish side”
– fixed income markets therefore will not necessarily price in higher inflation (dovish Fed)
– too early for consumers to react to higher cases
– this past summer, it took several months of rising cases before “cancellations” started
– media has not yet raised the alarms, meaning consumers have not been sensitized to rising cases
This adds up to a period where the rise in cases keeps the Fed on the dovish side. And coupled with infrastructure programs getting signed into law, this makes a good combination for rising equity prices.
– moreover, more policymakers are noting economy is still well below potential
– thus, inflation is not necessarily the primary focus of the Fed
In all, we still see a strong YE rally
Cyclicals outperformed yesterday –> in front of a big incoming economic data week
S&P 500 traded flat yesterday but over the past week has formed a pronounced bowl as highlighted below:
– we annotated this as a “slow consolidation”
– not surprising given the strong surge since mid-October
Bloomberg’s intraday heatmap (SPX Index IMAP << GO> > ) shows that leadership yesterday was primarily Epicenter aka Cyclicals. Thus:
– even in a “flat day” of market churn
– investors are still accumulating Epicenter
– this has a “risk-on” feel
– even as COVID-19 cases are rising
This week’s economic calendar is also packed with key data points. Among them:
– retail sales (Tuesday am)
– industrial production and capacity utilization (Tuesday am)
– Housing starts (Wed am)
– Economic leading index and Philly Fed index (Thursday am)
All in all, a big incoming data week. So we believe there will be a lot of reactionary behavior around this. But here is our playbook:
– if markets weaken, buy the dip –> Fed more dovish –> everything YE rally intact
– if markets strengthen, buy the strength –> demand strong –> everything YE rally intact
I realize this sounds circular, but we believe the risk/reward into YE remains strong.
TEXTBOOK SEASONALS: 2021 S&P 500 tracking precedent years (1H> 13%, n=12) closely
We have updated the chart below, comparing 2021 to the prior years when 1H returns exceed 13% (n=12):
– YTD, 2021 S&P 500 tracking prior years closely
– in fact, by coincidence, it is a “textbook” identical YTD return versus the composite
– interestingly, precedent years see total gains +29%
– if S&P 500 rises 29% in 2021, this implies 4,850
Thus, our YE target of 4,800 remains intact. We would therefore “buy the dips” into YE.
SECTORS: Leadership still Cyclicals/Early-cycle aka Epicenter
Relative sector performance is shown below and as we can see, 5 sectors are showing positive relative trend:
– Energy
– Basic Materials
– Technology
– Transports
– Discretionary
– sort of Financials/Banks
These are all cyclical groups. And also have general positive exposure to reflationary trends. Inflation, incidentally, in isolation is not a bad word. The real risk to markets is:
– too much inflation hurting consumer confidence
– or unanchored inflation expectations, fear of uncontained inflation
This is not necessarily what markets seem to be pricing. If markets were worried about either of the above, Defensive stocks or Growth stocks would be leading. Instead, we are seeing Cyclicals lead.
Into YE, our recommended strategies are:
– Energy
– Homebuilders (Golden 6 months) XHB 1.29%
– Small-caps IWM 0.59%
– Epicenter XLI 0.98% XLF 0.77% XLB 1.09% RCD
– Crypto equities BITO -0.78% GBTC -0.97% BITW -2.01%
Into 2022…
– Industrials
30 Granny Shot Ideas: We performed our quarterly rebalance on 10/25. Full stock list here –> Click here
POINT 1: Daily COVID-19 cases 171,365, up +37,600 vs 7D ago…
Current Trends — COVID-19 cases:
– Daily cases 171,365 vs 133,765 7D ago, up +37,600
– Daily cases ex-FL&NE 169,373 vs 131,838 7D ago, up +37,535
– 7D positivity rate 5.9% vs 5.4% 7D ago
– Hospitalized patients 43,659, up +3.2% vs 7D ago
– Daily deaths 1,134, down -7.2% vs 7D ago
*** Florida and Nebraska stopped publishing daily COVID stats updates on 6/4 and 6/30, respectively. We switched to use CDC surveillance data as the substitute. However, since CDC surveillance data is subject to a one-to-two day lag, we added a “US ex-FL&NE” in our daily cases and 7D delta sections in order to demonstrate a more comparable COVID development.
The latest COVID daily cases came in at 171,365, up +37,600 vs 7D ago. Many states didn’t report COVID data on Thursday in observance of Veteran’s Day. As such, the data is currently distorted as evident by the recent fluctuating 7D deltas.
Rolling 7D delta distorted due to observance of Veteran’s Day…
The rolling 7D delta is currently distorted due to the underreporting resulting from the observance of Veteran’s Day.
9 states are seeing a rise in cases while cases continue to decline in the remaining states…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling, and the other where cases are rising
In these tables, we’ve included the vaccine penetration, case peak information, and the current case trend for 50 US states + DC. The table for states where cases are declining is sorted by case % off of their recent peak, while the table for states where cases are rising is sorted by the current daily cases to pre-surge daily cases multiple.
- The states with higher ranks are the states that have seen a more significant decline / rise in daily cases
- We also calculated the number of days during the recent case surge
- The US as a whole, UK, and Israel are also shown at the top as a reference
Hospitalizations, deaths, and positivity rates are rolling over amidst case rollover…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.
– Net hospitalizations peaked below the Wave 3 peak and are currently rolling over
– Daily death peaked slightly above the Wave 2 peak and are currently rolling over
– As per the decline in daily cases, the positivity rate is currently rolling over
POINT 2: VACCINE: vaccination pace accelerates as boosters become more widely available…
Current Trends — Vaccinations:
– avg 1.4 million this past week vs 1.3 million last week
– overall, 58.4% fully vaccinated, 67.8% 1-dose+ received
Vaccination frontier update –> all states now near or above 80% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent.
Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC).
– Currently, all states are near or above 80% combined penetration
– Given the new multiplier. only RI, FL, MA, CT, NM, NY, NJ, IL, CA, PA, DE, SD, KY, UT, OK, ND, NH, AZ, SC, TN, AK, NC, CO, KS, MN, VA, DC, and NV are now above 100% combined penetration (vaccines + infections). Again, this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated
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%/100%. As you can see, all states have reached combined infection & vaccination > 100% (Reminder: this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within the state is either infected or vaccinated).
There were a total of 1,435,150 doses administered reported on Monday, up 22% vs. 7D ago. We are seeing the vaccination pace accelerate as booster shots are becoming more widely available. Also, the same catalysts remain in place:
- Proof of vaccination required by many US cities and venues
- Booster shots
- Full FDA approval of Pfizer COVID vaccines (hopefully it could help overcome vaccine hesitancy)
- Biden’s vaccination plan
The daily number of vaccines administered remains the most important metric to track this progress and we will be closely watching the relevant data.
74.9% of the US has seen 1-dose penetration > 60%…
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 45%/45%/50% of its residents fully vaccinated, displayed as the orange lines on the chart. Currently, 100% of US states have seen 40% of their residents fully vaccinated. However, when looking at the percentage of the US with at least 45% of its residents fully vaccinated, this figure is 98.7%. And only 88.5% of US (by state population) have seen 50% of its residents fully vaccinated.
We have done similarly for residents with at least 1-dose of the vaccination, denoted by the purple lines on the chart. While 98.9% of US states have seen 1 dose penetration > 50%, 94.4% of them have seen 1 dose penetration > 55% and 74.9% of them have seen 1 dose penetration > 60%.
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 has been falling significantly (red line is 7D moving avg). Both the surge in daily cases and decrease in daily vaccines administered contributed to this.
– the 7D moving average is about ~19 for the past few days
– this means 19 vaccines dosed for every 1 confirmed case
In total, 419 million vaccine doses have been administered across the country. Specifically, 225 million Americans (68% of US population) have received at least 1 dose of the vaccine. And 194 million Americans (59% of US population) are fully vaccinated.
POINT 3: Tracking the seasonality of COVID-19
In July, we noted that many states experienced similar case surges in 2021 to the ones they experienced in 2020. As such, along with the introduction of the more transmissible Delta variant, seasonality also appears to play an important role in the recent surge in daily cases, hospitalization, and deaths. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus.
The possible explanations for the seasonality we observed are:
– Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer
– “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors
If this holds true, seasonal analysis suggests that the Delta spike could roll over by following a similar pattern to 2020.
We created this section within our COVID update which tracks and compare the case, hospitalization, and death trends in both 2020 and 2021 at the state level. We grouped states geographically as they tend to trend similarly.
CASES
It seems as if the main factor contributing to current case trends right now is outdoor temperature. During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, northern state cases are showing a slight spike, especially when compared to Summer 2020. This could be attributed to the introduction of the more transmissible Delta variant and the lifting of restrictions combined with pent up demand for indoor activities.
HOSPITALIZATION
Current hospitalizations appear to be similar or less than Summer 2020 rates in most states. This is likely due to increased vaccination rates and the vaccine’s ability to reduce the severity of the virus.
DEATHS
Current death rates appear to be scattered compared to 2020 rates. This is likely due to varying vaccination rates in each state. States with higher vaccination rates seem to have lower death rates given the vaccine’s ability to reduce the severity of the virus; states with lower vaccination rates seem to have higher death rates.