COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?

Click HERE to access the FSInsight COVID-19 Daily Chartbook.

STRATEGY: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds.  What equity bubble?
This is our first commentary for the new year.  And perhaps, this is also the best time to start with a decade “look ahead” at the 2020s (weak pun intended).  It is perfectly understandable if someone is apprehensive about asset returns in the next decade for multiple reasons — sub-par growth since 2009 (secular weakness?), galactic intervention by Fed (money printing) and lack of reflationary dynamics (are we Japan?).

We see 4 reasons equities will perform surprisingly well over the next decade:
– no bubble in stocks –> “deflation” and “calamity insurance” outperformed stocks in the past 2 years, by a wide margin
– no bubble in stocks –> of $3 trillion of household flows into financial assets, bonds got 94%, a mere 6% into equities, or $183 billion
– no more deflation –> the sheer demographic influence of millennials is likely to push CPI higher
– best performing reflation assets –> real estate and equities, large-cap, small-cap and EM
– extra credit –> Bitcoin is an inflation hedge

While stocks managed to produce gains in 2020, it is more useful to look at the z-score (# standard deviations of relative performance).  And as shown below, since the start of 2019, bonds and gold easily outperformed equities:

– Bonds are a deflation hedge
– Gold is a calamity hedge
– Even housing prices outperformed stocks

In other words, risk-on/ pro-cyclical trades underperformed the past 24 months 

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: Bloomberg and Fundstrat



Second, look at the lopsided retail investor inflows since 2008.   Of the $3.1 trillion of inflows into financial assets, 94% went into bonds.  A mere $183 billion, of 6% went into equities.
– can stocks be in a “bubble” if 94% of investor inflows are into bonds?
– wouldn’t that make bonds a bubble?


COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: ICI, Bloomberg and Fundstrat


And one might be tempted to think the past 12 months shows a more favorable equity flow environment.  That is not the case.  As the time series chart below shows, investors liquidated stocks at an accelerating pace since 2017.  The past 3 years saw massive outflows from equities:
– if we squint, there is a small “blip” of inflows in the past few months
– how can this “blip” mark the top??!!!

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: ICI, Bloomberg and Fundstrat


As we are conflating data by combining ETF and mutual fund flows, below show the cumulative flows for each cohort separately.  Mutual funds are actively managed by experienced fund managers:
– outflows from equity mutual fund flows means the equity market has moved stocks into “weaker hands”
– mutual fund bonds flows have been the strongest
– so bonds have moved money into “stronger hands”

Again, I don’t see how this marks even the proximity of a top for equities.

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: ICI, Bloomberg and Fundstrat


Previously, we have written extensively about the demographic tailwind created by Millennials (born 1980 to 2000), so we are not going to repeat those analytics.  The most important aspect, in our view, is the growth rate of 30-50 year old in the US — the heart of the prime consumer:
– this figure is accelerating due to Millennials
– at a pace not seen since 1970-1999
– more importantly, see how CPI trends tend to follow this demographic profile?

If data from the last 90 years is correct, we should begin to see an uptick in CPI over the next decade.  The obvious winners are:
– Asset-based –> real estate, gold, Bitcoin
– Asset-based biz –> Epicenter aka Value aka Cyclicals

Losers:
– Asset-light biz –> Growth stocks
– Deflation hedge –> bonds lose


COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?





The past 60 years show inflation favors specific assets…
Our data science team, led by tireless Ken, compiled asset returns (based upon z-score) over the past 60 years, among 6 asset classes.
– small-cap equities
– EM equities
– Housing
– Gold/ commodities
– Bonds
– US large-cap equities
– FANG (past 10 years)

And highlighted when each asset class outperforms the composite by 1-std deviation, or z-score >1.0.  These extended periods of relative return signify that asset class massively outperforming.  This is a lot to process, so let me walk you through this by decades.


1960-1980, rising inflation…
An interesting sequence of leadership unfolded over those 20 years of rising inflation.
– small-caps led
– then EM (then known as “frontier stocks”)
– then housing
– then gold/ commodities

I found it interesting it started with small-caps

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: Fundstrat 

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?
COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?



1982-1990: Dis-inflation
Fed Chair Volcker broke the back of inflation in 1982.  And for the following decade, asset class leadership shifted dramatically.
– Bonds staged one of their single best relative return decade ever 

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: Fundstrat  

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: Fundstrat


1990-2008: Reflation…
And beginning 1990 (bit earlier actually), financial markets responded to a stable inflation environment.  This was a goldilocks period where inflation was slightly rising but not creating inflation risk.  And this moderation also led to outperformance of many reflationary trades.
– this is also why the 1990s was seen as a great time to be an investor, everything went up


COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: Fundstrat


2008 to 2020: Post-GFC world focused on “deflation risk”
Following the GFC, investors favored deflation trades, given the weak economic growth seen post-GFC and given the massive balance sheet expansion of central banks.  Basically, investors began to price in the World looking like “Japan”
– Bonds massively outperformed stocks
– FANG (growth) trounced Value

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: Fundstrat


2020-2030: Pick your poison, but the probability of rising inflation the highest in >30 years…
Apologies for that lengthy review, but to me, it seems worthwhile to walk through the different inflation/reflation regimes.  So this is where we need to “pick your poison” as to whether one believes inflation or deflation is more likely:

inflation
– small-cap equities
– EM equities
– real estate
– S&P 500 value stocks

deflation
– bonds
– FANG

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: Fundstrat 


We believe inflation is more probable.  But the future is uncertain.



COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?





STRATEGY: 67 stocks (*) in the ‘Top 3’ sectors…
Our data science team, led by tireless Ken, has put together the trifecta list of stocks, coming from the ‘top 3’ sectors: Discretionary, Industrials and Energy.  These are stocks that there is consensus between myself, Rauscher and Sluymer.

Consumer Discretionary (30 stocks)
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

Industrials (28 stocks)
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

Energy  (9 stocks)
HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX, XEC

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?
COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?

Source: Fundstrat  

(*) The 67 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 207,608, +63,179 vs 7D ago but holiday backlogs distort numbers
The latest COVID-19 daily cases came in at 207,608, up +63,179 vs 7D ago.  
– Data for the next few weeks will be distorted by holiday backlogs, lags in reporting
– And case transmission risk is higher due to the fact that we are finishing the holiday gathering season
– AZ, for instance, reported 17,234 cases vs 1,296 a week ago
– Clearly the state did not have >10X jump in daily cases, but this is the backlog


COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: COVID-19 Tracking Project  and Fundstrat

There were some notable gaps in data on New Year’s Day.  
– 20 states did not report case data on 1/1
– In addition to states not reporting, many labs/offices were closed, thus creating further gaps

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?






COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: COVID-19 Tracking and Fundstrat  





COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?
COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


 
Source: COVID-19 Tracking and Fundstrat 




COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: COVID-19 Tracking and Fundstrat  




POINT 2: About 4.3 million vaccine doses administered to Americans 
The rollout of the COVID-19 vaccine is falling behind the pace originally outlined by Operation Warpspeed.  But nevertheless, tremendous progress has been made.  According to multiple sources, it looks like about 4 million doses of the vaccine have been administered.

– this is about double from a week ago
– so the pace is accelerating

Our data science team is scraping the data and we can offer some visualizations soon.  But the Bloomberg tracker below highlights the unevenness well:

– few states have >3% of residents vaccinated
– those with the highest are MT, ND, SD, VT and Maine
– previously, YouYang Gang, the forecaster, estimates that about 20% of the residents need vaccination to be close to “herd immunity”
– the remaining 30%-35% is due to recovered infection rates

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: Bloomberg


Part of the issue with slow rollouts is the holiday period.  And as the comment from Mark Levine below @MarkLevineNYC notes, the pace of dosing occurs primarily on weekdays:
– if this is the case, imagine how much slower the pace is during holidays with closures, etc.

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: Twitter


The sheer logistics of rolling out a nationwide vaccination program are daunting.  And limited supplies of the vaccine itself contribute to delays.  One solution preferred by the head of Operation Warp Speed, Moncef Slaoui, is to use half doses of the Moderna vaccine.  Per the US News story below, a half dose has been seen as equally effective for those aged 18-55.  Hence, by cutting the dosage, almost 2X the number of Americans can get vaccinated.


COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


https://www.usnews.com/news/top-news/articles/2021-01-03/us-may-cut-some-moderna-vaccine-doses-in-half-to-speed-rollout-official-says


COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


https://www.usnews.com/news/top-news/articles/2021-01-03/us-may-cut-some-moderna-vaccine-doses-in-half-to-speed-rollout-official-says




POINT 3: Latino + Black is a rising share of COVID-19 cases since early November
While progress has been made to mitigate the spread of COVID-19 on multiple fronts, from nursing homes, to various states, the one trend that remains deteriorating is the rising share of minority cases.  We combined the reported share of Hispanic and Black cases:
– latest 7D average is 37%
– this is up from <30% in early November
– in the past 8 weeks, this share has jumped 700bp to the highest level since Summer

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: CDC, COIVD-19 Tracking Project and Fundstrat


Share of combined Hispanic + Black >50% in hardest hit states…
We know that CA, TX and even FL still report among the highest case figures across the US.  And as shown below, these states have >50% of their cases combined Hispanic + Black.  
– does this mean that to control COVID-19, the share needs to fall for these minority groups?
– it remains unclear to me why these ethnic groups have such a high share of cases

The two above questions, in my view, remain unknown but important questions.

COVID-19 UPDATE: Since 2009, of $3.1T retail inflows into financial assets, 94% into bonds. What equity bubble?


Source: CDC, COIVD-19 Tracking Project and Fundstrat

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