Omicron turning COVID into flu (rest of year) per Bill Gates. Bond market priced in a March hike, so stocks need to get used to this

I will be on vacation from 1/17 to 1/25, a late Christmas vacation

• we will still publish our COVID-19 daily commentary (thanks tireless Ken)
• market commentary will resume 1/26

STRATEGY: Omicron turning COVID into the flu (rest of year) per Bill Gates

More evidence COVID-19 becoming endemic –> Bill Gates uses “flu”
As many of you are aware, we think one of the more important debates in the next few months is the divergence between nations pursuing endemic (live with COVID-19) versus zero case strategies. And many of these zero case nations are pursuing increasingly authoritarian approaches to achieve this.

The tweet below by @BillGates, in my view, almost certainly destroys the rationale for zero case approach:

• per Bill
• “Once Omicron goes through…rest of year should see far fewer cases…so COVID can be treated more like the seasonal flu”

Whoa. This is a striking and cutting comment by Gates. Think about it:

• if post-Omicron is a seasonal flu
• how many nations pursue zero case policy for seasonal flu?
• how many nations quarantine and force lockdowns for seasonal flu?

It is worth considering.

Omicron burned through UK in 21 days
Omicron burned fiercely through the UK. And as we all know, the surge created a massive surge in cases:

• UK cases peaked on 1/4/2022
• from the start of the Omicron surge to peak
• it was 21 days

…among UK’s 9 regions, surge lasted 17 to 26 days
Among the 9 regions, the duration of the Omicron surge varied:

• shortest was North East UK with 17 days
• longest was 26 days in East of England and East Midlands
• London was 20 days

So, consistent with what was seen in South Africa, the Omicron surge is swift because the high R0 (18-30) but once cases peak, cases begin to roll over fast.

• cases are rolling hard in London in particular

…Cases also peaked in NYC, New York State and Connecticut in less than 25 days
Omicron has moved pretty quickly through the Northeast USA as well. Like other regions, a parabolic rise in cases followed the entry of Omicron. But this surge does apex within 25 days:

• NYC 25 days
• New York state 25 days
• Connecticut 21 days

The point is that cases locally peak fairly quickly, wherever there is an outbreak stemming from Omicron.

Return to office debate: COVID-19 loses 50% ability to infect in 10 seconds
A study by Professor Jonathan Reid, director at University of Bristol’s Aerosol Research Center, highlights a really interesting conclusion:

• COVID-19 loses 50% of its ability to infect after 10 seconds
• this highlights the importance of distance
• and ventilation

This is pretty insightful, as previously, studies highlighted the persistence of COVID-19 to linger in aerosol form within an environment. But this study suggests that COVID-19 quickly loses its ability to infect others with the passage of time. And the policy impacts are interesting, but the main things are obvious:

• distance
• time
• enclosed spaces are relatively safer than they originally appeared to be

…JPMorgan warning of those unvaxxed and inability to return to officeI read the above article and provides context to the following two stories:

• JPMorgan warns employees about remaining unvaxxed and having employment
• Goldman Sachs delays return to 2/1 (two week delay)

STRATEGY: Bond market priced in a March hike, so stocks need to get used to thisThe bond market has priced in a March Fed hike (80% probability). And the latest inflation data adds to the general consensus’ perception of a sustained rise in inflation. So, we believe equity markets will soon price in the start of a Fed rate hike cycle. A review of history shows this cycle has led to a downturn in stocks around the start of a hiking cycle. In the past 4 instances, the size of the drawdown was 10% or higher. Thus, it makes sense for investors to be somewhat wary of this potential.

• the S&P 500 was down the first 5 days of 2021
• in non-recession years, the FY return, after down 1st 5 days
• S&P 500 +13.5%

So, the fact that markets are down in the first 5 days is not really significant.

…markets reminding us 1H2022 expected to be “treacherous”
Take a look at the chart below, showing markets for the first days of 2022. In general, this is a rocky start.

…last 2 precedent examples of “down first 5 days” was 2014 and 2016
The last 2 times equities were weak in the first 5 days were 2014 and 2016:

• in each instance
• markets were weaker throughout the month of January
• yet, S&P 500 was up for the year
• 2014 –> +11.4%
• 2016 –> +9.5%

So the point is the following:

• we expect 1H2022 to be treacherous
• we expect markets to rally in Jan … S&P 500 to 5,000
• that is still our base case
• but 2014 and 2016 suggest that we could be optimistic
• but the broader picture remains that 1H2022 is treacherous

The abrupt reversal in equities, yesterday, was in part to comments made by Federal Reserve Governor, Lael Brainard, who was speaking at her confirmation hearing in front of Congress:

• Yesterday, Fed Brainard spoke at her confirmation hearing
• She signaled she is open to raising rates in March
• markets can often overreact
• recall the 7% drawdown following the announcement of Omicron variant –> all recovered now
• recall the 25% decline in WTI oil after the US announces SPR –> all recovered now

…Brian Rauscher, Global Portfolio Strategist for Fundstrat, sees 2022 even stronger than our base case
Brian Rauscher, Head of Global Portfolio Strategy, hosted his 2022 Outlook yesterday (replay available soon, stay tuned to email updates). There are two slides I wanted to share from his presentation.

First:

• base case is S&P 500 5,080 to 6,170
• based upon P/E of 20-22X
• this is above our S&P 500 base case of 5,100
• but is consistent with our comment 5,400 to 5,600 more inline with precedent

RAUSCHER: Top 3 sectors –> Technology, Consumer Discretionary and Energy
The other slide I wanted to highlight are his top 3 sector Overweights:

• Technology
• Consumer Discretionary
• Energy

These are based upon his proprietary models, which reflect both fundamental and momentum-based metrics.

STRATEGY: 4 Sectors have multiple recommendations from the team
We have updated the sector recommendation matrix below to reflect the sector recommendations from the 4 team leaders of our macro strategies: Macro (me), Technical Strategy (Newton), Quantitative Strategy (Gould) and Global Strategy (Rauscher).

Here are the commonly recommended groups:

4 of 4 team leaders recommend:
– Technology

3 of 4 team leaders recommend:
– Healthcare
– Consumer Discretionary
– Energy

The matrix is shown below.

STRATEGY: 2022 theme –> BEEF –> Bitcoin (B) + Bitcoin equities (E) + Energy (E) + FAANG (F)
Our 2022 themes are shown below. And in not in any order:

• Bitcoin + Bitcoin Equities BITO3.94%  GBTC4.29%  BITW5.27%
• Energy
• FAANG FNGS-1.11%  QQQ-0.67%

Combined, it can be shorted to BEEF.

• Homebuilders (Oct – Apr aka Golden 6 months) XHB

30 Granny Shot Ideas:

AAP4.25% , AAPL-0.57% , AMZN-0.99% , ATVI, AVGO-1.84% , AXP-0.08% , AZO1.19% , BF/B, CSCO0.67% , EOG-0.48% , GOOG0.33% , GRMN-0.25% , KLAC-2.24% , MPC-3.67% , MSFT-1.90% , NVDA0.62% , PHM-0.18% , PM0.68% , PSX-2.51% , PYPL-1.71% , QCOM-2.01% , QRVO-1.92% , ROST-0.75% , TGT, TSLA-3.56% , TXN, ULTA, USB, WRB, XLNX

Figure: Fundstrat Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019