COVID-19 UPDATE: Post-Georgia run-off, VIX should fall = risk-on. UK variant seems to be more contagious for 20-year olds
Click HERE to access the FSInsight COVID-19 Daily Chartbook.
STRATEGY: Post-Georgia Senate run-off, VIX should fall = risk-on stocks
Equities staged a decent bounce Tuesday, even as the Georgia Senate run-off elections were not yet decided. The consensus seems to believe that if Dems win both seats, this is negative for stocks because of the risk of higher taxes. But market expectations about election outcome are not really reliable. I don’t know the future, but to me, the “uncertainty” of the election is arguably a bigger overhang than the actual outcome. Moreover, check out the comments from Tom Block, Fundstrat’s Head of Policy Strategy below regarding the impact of a Dem sweep in Georgia:
– he doubts Congress pass higher capital gains taxes (perhaps corporate) and a heavy conservative bent remains in the Senate
Source: CNBC and Fundstrat
But we think the bigger implication is that this “uncertainty” is lifted from markets. Take a look at the VIX below and you can see we have seen a 30 level on Monday and a 33 the week prior. These are extremely elevated levels. And the question we should ask is whether the VIX will remain elevated post-Senate outcome.
– I think the VIX is likely to resume its downward trend, and potentially fall below 20
– a decline below 20 would likely create inflows from systematic and leveraged investors
– this equals risk-on
Source: Bloomberg
So we think stocks will resume their upward bias in the coming weeks, and move towards S&P 500 4,000 by Feb-April timeframe (see our 2021 outlook for the rationale). And we continue to favor OW (overweight) the Epicenter sectors. Our top 3 remain:
– Consumer Discretionary
– Energy
– Industrials
And the rationale is described below. Of these, the least intuitive is Energy. But as we commented a few times recently, we think the sector has been so obliterated, that even a modicum of decent news would lead to positive equity price gains.
Source: Fundstrat
Energy historically stage large rebounds after 5-year slumps… does not mean this has to happen in 2021… but it could
Yesterday, we shared this chart created by our data science team, led by tireless Ken, which plotted the precedent Energy bear markets (vs S&P 500) since 1920. These are all plotted below. And the dramatic nature of the current decline becomes even more apparent:
– Since 2015, Energy has underperformed the S&P 500 by ~8,000bp
– This is the worst ever 5-year stretch of underperformance
– The next worst was 1957-1960, and Energy underperformed by ~5,500bp
Source: Fundstrat and FAMA and Bloomberg
Energy post-slump: the bigger the decline, the bigger the rebound…
Take a look at the 24-month forward relative return of Energy stocks after each of the identified slumps. The forward 24-month returns have been tremendous.
– the larger the slump, the larger the subsequent rebound
– the 2015-2020 slump is “off the charts” bad
Granted, this does not mean Energy has to rebound in 2021.
Source: Fundstrat and FAMA and Bloomberg
But we also think the set-up is very favorable — less bad news here = good news. As we discussed in our 2021 Outlook, Energy seems to be a sector where the supply and demand dynamics become structurally a lot more favorable in 2021:
– US future supply will be constrained by a Democratic White House
– Financial capital will be constrained as private equity will not bail out the sector ala 2016
– Demand will recover given the US economy is starting a new expansion
So you can see how this supply/demand alignment might be one of the most favorable for several decades.
Energy TRIFECTA (*): 9 stocks that our three macro teams like…
Below are the 9 stocks that are the Energy trifecta — rated OW by each of the 3 macro teams.
– HP
– NOV
– SLB
– EOG
– PXD
– HFC
– MPC
– PSX
– XEC
Source: Fundstrat
(*) These 9 Energy Trifecta stock ideas are the subset of the “Epicenter” Trifecta stock list we published on December 11th, 2020. To view the full list of stock idea, 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.
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), Sluymer (Technicals)
– Biden vs Trump –> based on correlation to either candidate odds
Granny Shots:
Full stock list here –> Click here
Tickers: AAPL, AMZN, AXP, BF.B, CSCO, EBAY, GOOG, GRMN, GWW, INTC, KLAC, LEN, LOW, MNST, MSFT, MXIM, NVDA, OMC, PM, PYPL, QCOM, TSLA, XLNX
Trifecta Epicenter (*):
Full stock list here –> Click here
Tickers: AN, GM, F, HOG, GRMN, LEG, TPX, PHM, TOL, NWL, HAS, MAT, PII, MGM, HLT, MAR, NCLH, RCL, WH, WYND, SIX, DRI, SBUX, FL, GPS, LB, CRI, VFC, GPC, BBY, FITB, WTFC, ASB, BOH, FHN, FNB, PB, PBCT, RF, STL, TFC, WBS, PNFP, SBNY, NYCB, MTG, AGNC, EVR, IBKR, VIRT, BK, STT, SYF, BHF, AGCO, OC, ACM, WAB, EMR, GNRC, NVT, CSL, GE, MMM, IEX, PNR, CFX, DOV, MIDD, SNA, XYL, FLS, DAL, JBLU, LUV, MIC, KEX, UNP, JBHT, R, UBER, UHAL, HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX, XEC, LYB, EXP, MLM, CF, MOS, ESI, NEU, NUE, RS, SON, STOR, HIW, CPT, UDR, KIM, NNN, VNO, JBGS, RYN
Biden White House vs. Trump White House:
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 cases 206,630, +18,635 vs 7D ago –> still holiday distortions
The latest COVID-19 daily cases came in at 206,630, up +18,635 vs 7D ago.
– the holiday effect is going to cause distortions for several weeks
– over Thanksgiving, it was not until a full two weeks after Thanksgiving that underlying trends were visible
– this will be the case with current data, meaning mid-Jan is when we can start to get a better handle on trends
Source: COVID-19 Tracking Project and Fundstrat
The 7D delta turned positive, but this 7D delta is improved versus the last few days
– because of holiday scheduled closures/etc, distortions in the data will be prevalent until mid-Jan
– so I would look at trends with a grain of salt
Source: COVID-19 Tracking and Fundstrat
Source: COVID-19 Tracking and Fundstrat
Source: COVID-19 Tracking and Fundstrat
POINT 2: COVID-19 getting worse in NYC and FL, but really slowing in WIINSU
There has been a lot of reports of dense crowds in FL over the holidays and as such, this raises the risk of a rise in cases in FL. Take a look at the 3 larger counties in FL and you can see the surge in daily cases over the past few weeks.
– but more notably, see the surge in the past week?
– this is the holiday spike
Source: Johns Hopkins and Fundstrat
On the other hand, take a look at the states that early were at the heart of Wave 3 — WI, IL, ID, ND, SD and UT, or WIINSU.
– see how dramatically cases have collapsed in these states?
– this even as mitigation measures in these 6 states was arguably largely nominal
Does this again point to the idea that these states could be closer to herd immunity?
– plus many of these states have been among the most aggressive in administering the vaccine
It bears watching
Source: Johns Hopkins and Fundstrat
POINT 3: London cases exploding and is UK variant more contagious to 20 year-olds?
We have been wondering whether we would see a unique surge in UK cases, since reports of this new potentially more transmissible UK variant first emerged. Take a look below and see the daily cases per 1mm in various global cities
– Most of Europe has seen a hard rollover of cases
– But London cases are absolutely exploding
Source: Johns Hopkins and Fundstrat
The Imperial College has a pre-print study out regarding this new UK variant (referred to as VOC). We shared the preprint link below.
https://www.imperial.ac.uk/media/imperial-college/medicine/mrc-gida/2020-12-31-COVID19-Report-42-Preprint-VOC.pdf
The takeaway seems to be that more under 20-year olds are catching COVID-19. It is not exactly clear to me why but this does not bode well for the rest of the world if this is the case. As the surge in London cases could be a precursor to what we see elsewhere.
– but does this make me more pessimistic?
– ultimately, if the vaccine is effective against this strain, I don’t know if this really changes anything
