Markets enter October wary, S&P 500 suffering technical damage, but outperformance of Epicenter remains telling

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STRATEGY: Markets enter October wary, S&P 500 suffering technical damage, but outperformance of Epicenter remains telling

Overall, case trends are improving, but at a slowing pace…COVID-19 case trends continue to show improvement, but at a slowing pace.  We can see this below as cases are down the same day a week ago (see prior days):

– cases reported Sunday are low because many states do not report cases on Sunday
– but see the prior days of the week?  Case trends are improving but at a slowing pace

This next chart comes from our chartbook (pdf attached) and I circled in blue the instances where cases are surging in states:

– specifically, where cases are threatening to make new highs
– surge remains higher
– it looks like 7 states: ID, ME, NH, VT, WV, MT and Alaska

Fortunately, we are not seeing this in larger states like:

– NY, NJ, CT, MA, RI
– FL, CA, TX, AZ

So, for now, it looks like the Delta-variant surge remains largely in retreat and the risk remains, as the flu season arrives in the Northern hemisphere we could see a new surge.  But this is not a foregone conclusion. Hopefully, there is not a new more transmissible variant that emerges.

With approval of boosters, pace of vaccinations is rising
There were a total of 1,244,526 doses administered reported on Sunday, up 70% vs. 7D ago. We are once again seeing the vaccination pace pick up 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.

STRATEGY: Markets enter October wary, S&P 500 suffering technical damage, but outperformance of Epicenter remains telling
I spent this past week at an investor conference, meeting mostly individual investors and some wealth advisors.  We will have some write-ups detailing some of the presentation in coming days.  I did not get the sense that individual investors are that outright enthusiastic about stocks, in the near term. 

There remain the same litany of issues that have damaged market confidence:

– COVID-19 delta surge
– concerns about “peak everything”
– are these supply chain glitches or is this massive inflation
– interest rates are rising, which many see as a negative (we really don’t)
– Fed is tapering
– S&P 500 has been acting poorly since July
– S&P 500 suffered technical damage
– S&P 500 has risen so much in the last 18 months, it is far above its 200D
– October tends to be a bad month for stocks

New
– Washington turmoil on debt ceiling
– Fed Chair nomination in peril given trading revelations of Fed governors
– Earnings season might show cost pressures

So, this is the wall of worry facing stocks.  And our base remains that this skepticism is healthy and the type that allows markets to surprise to the upside.

…Fed chair nomination odds are declining, but Powell still favored
The recent revelations of trading by Fed governors has brought the wrath of Sen Warren onto the Fed.  That was on ample display last week, and the Barrons article is useful.  In summary:

– Powell still favored
– Sen Warren has no direct role, and her impact is behind the scenes
– depends on how badly Sen Warren wants Powell gone

As shown below, Predictit betting markets are showing a decline in the odds of Powell from 80% or so in August, to 64% now.  And this is offset by a rise in the predicted odds for Brainard.

– my opinion, Powell has earned his continuance in his role
– Fed has taken decisive action post-fallout
– markets don’t like uncertainty
– so this will hang over markets for the next few months

Even as S&P 500 remains tumultuous, Epicenter exerting leadership — Energy now up +43% YTD
While there remains quite a lot of technical damage to markets (see our comments from last week), we still think the risk/reward for equities remains positive.  Moreover, leadership of equities has been revealing:

– outperformance is being led by Energy, Materials and Financials
– these are Epicenter groups aka Cyclicals
– if economic resilience / growth peaking, these should not be leading
– Defensives are doing poorly
– Growth is ok

Epicenter stocks suffer most from supply chain glitches, labor costs, inflation pressures, so Epicenter leadership suggests pressures not as severe
So, the sector leadership by Epicenter, in our view, supports the idea that underlying economic and fundamental outlook is strong.  After all, it is these sectors that suffer from the:

– lingering supply chain glitches
– inflationary pressures
– labor cost increases
– overall margins pressures

In fact, we think the reason they might be performing well, is there remains substantial pent-up demand.  For instance, this travel article already notes the strength of holiday bookings.  These are driving up prices, but this sure looks like a healthy thing for businesses.

– according to the article
– comparing 2021 to 2019
– bookings are up +35.5%

Does this sound like demand is peaking?

Even Italian vineyards are finding ways around labor shortage.  The WSJ article below highlights how one winemaker acquired robots to replace the grape pickers who are in severe short supply, due to travel restrictions. 

– companies innovating is a good thing
– when labor costs rise, it raises the return on investment of “cost savings”

Thus, the very existence of cost pressures will drive innovation.

Since February, US equities markets outperform, Energy has been leader in every region
S&P 500 continues to lead global markets, as shown below.  These show regional equity market performance relative to MSCI all-world index. 

– S&P 500 outperforms by 600bp
– Europe leadership is weakening
– US small-caps are beginning to strengthen
– US small-cap leadership hints at strengthening fundamentals, not weakening

…Energy is outperforming around the World
We know Energy that is not necessarily embraced by investors, particularly those with ESG sensitivities, or a general tilt away from commodity-sensitive groups.  But as we have written about extensively, the opportunity for Energy remains a multitude of positive factors:

– Pent-up demand as travel continues to recover
– Supply constraints given less accommodative White House
– Future supply constraints as less financial capital is available (this differs from 2016 that way)
– Energy stocks are at a discount to oil price, on a comparative basis

Regional Energy stocks, as shown below, have outperformed the MSCI all-world index as shown below.  Again, this is to affirm that this rise in Energy equities has been seen throughout the world in 2021

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POINT 1: Daily COVID-19 cases 20,631, down -4,813 vs 7D ago…
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Current Trends — COVID-19 cases: 
– Daily cases   20,631 vs 25,444 7D ago, down -4,813
– Daily cases ex-FL&NE   20,631 vs 112,055 7D ago, up +846
– 7D positivity rate  5.7% vs 6.9% 7D ago
– Hospitalized patients   67,512, down -12.5% vs 7D ago
– Daily deaths  1,814,   down -8.0% vs 7D ago
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*** 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 20,631, down -4,813 vs 7D ago. As indicated by the consistently negative 7D deltas, cases are currently rolling over. At the individual state level, we’ve recently been at the critical stage of case rollover as more states begin to turn. We will continue to monitor all relevant data closely, but as long as 7D deltas remain negative, case rollover will continue. 

Rolling 7D delta in daily cases is negative…
As shown in the chart below, the rolling 7D delta in daily cases remains negative. The negative rolling 7D delta further emphasizes the case roll over.

Low vaccinated states seem to have a larger increase in daily cases compared to their recent low…
The “Parabolic Case Surge Tracker” monitors the possible parabolic surge in daily case figures. In the table, we included both the vaccine penetration and the recent case trend for 50 US states + DC. The table is sorted by the multiple of their recent peak daily cases divided by the daily cases when their case surges started.

– The states with higher ranks are the states that have seen a more significant rise in daily cases
– We also calculated the number of days during the recent case surge; a state with a high multiple but low number of days since its low means the state is facing a relatively rapid surge in daily cases
– The US as a whole, UK, and Israel are also shown at the top as a reference

Hospitalization continues rising, while positivity rate has plateaued… Daily deaths also start to surge now…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.

– Hospitalization has exceeded the peak level we’ve seen in Wave 1 and 2 in 2020 and continues surging.
– With the increasing number of daily tests, positivity rate has plateaued over the past week. As daily cases have already start to roll over in some states, the positivity rate could roll over soon.
– Daily deaths have been surging recently, but less “dramatic” than the cases or hospitalization trends. Currently, daily death has surpassed the peak we have seen in Wave 2.

POINT 2: VACCINE: vaccination pace has slowed, but could rise on booster eligibility 

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Current Trends — Vaccinations: 
– avg 0.8 million this past week vs 0.6 million last week
– overall, 55.4% fully vaccinated, 64.2% 1-dose+ received
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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, and DE 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 90% combined vaccination + infection. 90.0% of US states (based on state population) have seen 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 1,244,526 doses administered reported on Sunday, up 70% vs. 7D ago. We are once again seeing the vaccination pace pick up 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.

57.1% 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 96.1%. And only 81.6% 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 98.7% of US states have seen 1 dose penetration >50%, 86.8% of them have seen 1 dose penetration >55% and 61.1% 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 ~12 for the past few days
– this means 5 vaccines dosed for every 1 confirmed case

In total, 397 million vaccine doses have been administered across the country. Specifically, 213 million Americans (65% of US population) have received at least 1 dose of the vaccine. And 184 million Americans (56% 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.