Omicron is eradicating a more dangerous variant. After a +27% year, history implies S&P 500 2022 5,400-5,600 = our base case is conservative

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This is our final note for 2021. While the S&P 500 is on track to gain more than 25%, this has been labored gains given the constant tumult of COVID-19, Fed policy pivots (anticipation), persistent negativity and general public exhaustion with pandemic restrictions. I want to thank our paying clients for their support throughout the pandemic. Our firm’s sole source of revenues is research fees paid to us as we do not manage capital, nor conduct investment banking. We are solely gaining when our clients gain. So thank you for keeping us in business!!!

STRATEGY: CDC drastically overestimated Omicron share…

Delta likely making many sick Delta variant still prevalent in the USA and could be the factor in rising hospitalizations
As Dr. Scott Gottlieb notes below, the CDC previously overestimated the prevalence of the Omicron variant in the US:

• previously, last week share was posted as 73%, staggering rise for Omicron
• revised estimate is 22% (down from 73%)
• that is a drastic drop

This means that likely 78% of confirmed cases last week were Delta variant. Delta surge has been shown to lead to a rise in hospitalizations at 2.9%, the highest of any wave.

• so chances are
• if one caught COVID-19 recently, AND felt very ill
• this could be a case of Delta variant, not Omicron

COVID-19 remains tragic and unpredictable. And this CDC restatement shows that even surveillance is flawed. What we need to be mindful of is policymakers are making decisions off of this flawed data. And this could lead to policy errors. The best example is the > 25 nations closing borders due to Omicron. We highlighted this as a gross error and time has proven this to be correct.

…Delta drove the highest incremental hospitalization rate
To appreciate the difference between Omicron and Delta, take a look at the incremental hospitalization rate below:

• Delta wave had an incremental hospitalization rate of 2.9%, which is nearly double Wave 3
• and the highest rate except for Wave 1
• Wave 1 hit elderly patients and nursing homes
• So, Delta might have had the highest hospitalization rate
• Delta carried a higher viral load
• And many Americans have an existing co-morbidity such as high blood pressure, asthma, or obesity

Below is the CDC updated estimates of variant share. This shows the estimated share by week:

• Omicron continues to gain share
• current share for this week is estimated at 59%
• so it is still steadily gaining
• and naturally, trajectory suggests it will soon be 100% within a few weeks
• maybe even next week

Omicron infection protects against Delta — aka, Omicron is eradicating a more dangerous variant
Nobody wants to catch COVID. But if there is a variant that could be considered the least pathogenic, it is the Omicron variant, given the drastically lower hospitalization rates.

• in other words, Omicron spread is eradicating a region of the Delta variant
• and is akin to a very crude vaccination against prior variants
• if this is true, perhaps the idea of Omicron driving herd immunity is somewhat darkly possible

STRATEGY: After +27% S&P 500 gains, history says 2022 gains 12% to 16%, implying 5,400 to 5,600 = Fundstrat base case conservative
The S&P 500 is up 27% YTD and on track to close at or above our base case of 4,800. Looking back at 2021, this has been labored gains and we realize this has been a very difficult year for our active manager clients. But the rise in equities, in our view, has been justified by the substantial economic resilience coupled with tremendous operating leverage of businesses.

The natural question is what to expect for markets in 2022, particularly after a 27% gain. Tireless Ken, the head of our data science team, pulled together some statistics:

• equity markets return median 11% following a +27% year
• post-1938, returns are even higher
• median gain is 16%, average gain 12%

• as we stated in our 2022 outlook, pre-1938, equity returns essentially averaged 1% from 1871 to 1938, so that 70 year period is riddled with sub-par returns in total.

• Applying 12% to 16% gains implies S&P 500 5,400 to 5,600

Thus, we believe our base case of S&P 500 5,100 is conservative.

…In fact, the only bad year post-1938 is 1946
Take a look at the time series below. We illustrate every year, post a +27% year in the stock market. Below shows the returns as a time series. And as you can see, below:

• 7 of last 8 times S&P 500 > 27% return
• market was higher with double-digit returns
• in fact, most years post +27% gains are actually very good

…thus, our S&P 500 5,100 by YE 2022 target looks conservative, but we also expect plenty of turbulence in 2022
In short, our 2022 YE target of 5,100 looks conservative:

• using avg gain of +12% implies 5,400
• using median gain of +16% implies 5,600
• these are post-1938

But as we highlighted in our 2022 outlook, we think there is risk of substantial turbulence in 2022, particularly 1H:

• our base case is markets are essentially flat in 1H2022
• a rally through Jan 2022/early Feb 2022
• then lots of sideways and probably down 10%?

• 2H sees strong gains
• total return +11%
• but +12% to +16% probably more appropriate

But the drivers for 1H turbulence are pretty evident and known. These are detailed below.

• question for myself
• if these risks are obvious
• have they been discounted?

The future is uncertain.

Have a great New Year! And again, thank you for being a client. We could not survive without your support.

SECTORS: Leadership still Cyclicals/Early-cycle aka Epicenter
Relative sector performance is shown below and as we can see, 5 sectors are showing a 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
• Small-caps: IWM 0.05%
• Epicenter: XLI 0.11%  XLF 0.60%  XLB 0.85%  RCD
• Crypto equities: BITO 2.64%  GBTC 2.72%  BITW 3.20%

30 Granny Shot Ideas: We performed our quarterly rebalance on 10/25. Full stock list here –> Click here

POINT 1: Daily COVID-19 cases 397,662, up +223,500 vs 7D ago…

Current Trends — COVID-19 cases:

• Daily cases 397,662 vs 174,162 7D ago, up +223,500
• 7D positivity rate 16.6% vs 9.0% 7D ago
• Hospitalized patients 76,968, up +17.4% vs 7D ago
• Daily deaths 1,222, down -8.8% vs 7D ago

The latest COVID daily cases came in at 397,662, up +223,500 vs 7D ago. Daily cases are generally higher in all US states largely due to the rapid spread of Omicron variant. However, the daily cases, as well as the 7D delta, are also overstated because of the data distortion resulted from holiday closures. For a few states, such as California, yesterday was the first time they reported COVID stats since the Christmas holiday. Soon will be New Year’s day, and we expect the case data will be distorted again. That said, there is no doubt that the cases are rising and will continue to rise for a while. Our base case remains that Omicron surge will peak by early/mid-January.

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7D delta in daily cases continues to rise due to the Omicron variant…
The rise in 7D delta in daily cases persists as Omicron spread continues. Latest 7D delta in daily cases came in at over 220k which elevated the 7D Avg to over 100k, the highest level since the Delta wave. We expect the 7D delta will remain high for a while. However, given the reduced severity of the variant, we expect the daily hospitalization and daily deaths to increase at a much lower pace. But if the positivity rate remains high, it tells us that there might not be enough tests performed.

33 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 rising…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.

• Both net hospitalizations and daily death have turned upwards.
• Positivity rate climbed to > 10%. This could be partially because of the data distortion due to holidays – case numbers were reported, while numbers of tests were not. But if the positivity rate remains high, it tells us that there might not be enough tests performed.

POINT 2: VACCINE: vaccination pace accelerates as boosters become more widely available…

Current Trends — Vaccinations:

• avg 1.1 million this past week vs 1.5 million last week
• overall, 20.2% received booster doses, 61.4% fully vaccinated, 72.4% 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 90% combined penetration
• Given the 2.5x multiplier, all states besides AR, HI, LA, MS, IN, WA, WV, OR, TX, OH, ID, MI, MO, and GA 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

There were a total of 1,531,259 doses administered reported on Tuesday. Daily number of vaccines administered has fallen recently, but we believe this is largely due to holiday closures. And with the surge of the Omicron cases, we expect the vaccination stats will start to pick up following the holidays. Also, the same catalysts remain in place:

• Proof of vaccination required by many US cities and venues
• Booster shots
• Israel study shows efficacy of vaccines against Omicron variant (although reduced)

The daily number of vaccines administered remains the most important metric to track this progress and we will be closely watching the relevant data.

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

In total, 444 million vaccine doses have been administered across the country. Specifically, 240 million Americans (72% of US population) have received at least 1 dose of the vaccine. And 204 million Americans (61% 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 (and Omicron) 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.