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Friday
STRATEGY: Bending, not breaking = market resilience continues to be underestimated
S&P 500 down 2% and Nasdaq down 3% on a “scared tape” day
Equity markets faltered sharply yesterday. And this was the worst day in markets in more than 6 months, even worse than the sell-off from the Evergrande debacle.
– did something change yesterday?
– there was angst around Washington turmoil (Sec Yellen said date of funding deadline 10/18)
– there is the Merkel loss
– there is the rise in rates
– there is the general fear of inflation
– there is general “October bad”
But actually, it was just a lot of reasons cited for what amounted to a very weak day for markets.
S&P 500 “touches” 100D — again, an echo of last week’s sell-off? — aka double-bottom?
Well, if one wants to see any “half-fulls” in the price now, it is the S&P 500 touched its 100D moving average.
– the S&P 500 was skidding along 50D for the past few days (below)
– yesterday, S&P 500 fell off the 50D
– and slipped to touch the 100D
Thus, one could look at this as retest of the lows from last week. If this is the case, markets need to find footing soon, which is what we expect.
And unless the larger story arc has changed, touching the 100D has been a great entry for the S&P 500.
– strangely, this same 100D touch took place late September
– is this just a repeat of 2020?
I hope not. Markets are not supposed to be this straightforward.
…Did rising interest rates cross a pain threshold?
Interest rates continued to rise yesterday, crossing above 1.50%. Generally, we view the rise in interest rates as constructive, as it stems from reflation.
– after tumbling to 1.13% (negative signal)
– rising to 1.40% was a positive milestone (last week)
– did 1.50% suddenly represent a level of pain?
– it is odd, and yet, this could be the message from markets
– after all, it is at this 1.50% level that we saw an accelerating decline in Nasdaq -3%, which is Technology/ FAANG heavy.
Sector leadership during rising rates/ inflation –> Fundstrat Quant research shows Epicenter leads, but Technology holds its own
In case you have not been introduced, our Head of Quantitative and AI Strategy is Adam Gould. Formerly of Empirical Research and Nomura, Adam has a multi-decade career in developing a quantitative narrative around markets. He shared a few charts with the research team that are pertinent.
Mr Gould looked a sector excess returns during periods of rising and falling inflation. The results are below:
– S&P 500 overall has decent excess returns during rising inflation = good
– Financials and Basic Materials do best when inflation is rising = good for Epicenter
As for Technology:
– Technology returns generally hold up well and are identical to returns when inflation is falling
In other words, the sell-off in the NASDAQ is an over-reaction, if historical precedent holds true. And that again is our base case.
…Fundstrat Quant Strategist highlights FAANG Net Income margin now at all-time high –> not impacted by inflation
Moreover, Mr. Gould also highlights that FAANG net income margins are hitting all-time highs. This is a key observation:
– FAANG margins will not take a hit from rising inflation, necessarily
– but they might see positive price pass-through
– GOOG 0.43% FB can raise ad rates –> higher sales
– AMZN 0.29% AAPL 2.17% sees product price increases –> higher sales
– NFLX 1.46% has a higher umbrella for its subscription base rates –> higher sales
So:
– if topline is not hurt by inflation = good for FAANG
– and margins are not hurt by inflation = good for FAANG
– and Technology does well during rising rates = good for FAANG
Does it make sense to be reducing exposure to FAANG? In our view, this is not the case at the moment. Hence, we still recommend FAANG. But, there is a caveat:
– FAANG is crowded
– so it suffers from “crowded long” syndrome.
Index Strategy pioneer, Rob Arnott, says entering era of Value investing = we agree…
For those not familiar with Rob Arnott, he is essentially the father of factor-based investing. He developed many of the indices used today by quantitative managers and in a way, is a pioneer in much of quant. In his recent blog post, written up by Business Insider, Arnott makes a statement on value investing:
– Value stocks could give investors 10% annual returns through next decade
– Two drivers
– Value stocks are at lowest 10% of valuation relative to Growth, even lower than Tech-bubble era
– Economic growth strengthening is a tailwind for sectors typically in Value index –> Epicenter
So he is saying there is a double tailwind:
– “E” going up –> Epicenter go up
– “P/E” going up –> Epicenter go up
…Since 1926, rising interest rates = outperformance of Value
Our data science team also has data that generally supports that rising interest rates is a better environment for value stocks. Value index now is essentially comprised of Epicenter stocks. So view this as a proxy for Epicenter:
– interest rates rose from 1954-1981
– Value clearly trounced Growth
– interest rates rose from 2002-2007
– Value clearly trounced Growth
So, there is precedent for Value aka Cyclicals aka Epicenter to outperform during periods of rising interest rates.
BOTTOM LINE: Equities markets are resilient and we still see an everything rally into YE
I know investors are concerned about turmoil and the potential of a government shutdown. But as we all know well:
– there is not really a time where the stock market faced a major peak because
– a gov’t shutdown
– a debt ceiling
– a GDP miss
– an earnings “weak” thesis
The big mother of all declines is due to Fed policy error and business cycle turns. And in the interim, keep the Timex slogan (see commercial below) in mind:
– S&P 500 takes a licking but keeps on ticking
In short, we see the weakness yesterday as a buying opportunity:
– we would be aggressive buyers
– we like Epicenter into YE, Energy is our top pick XLE 1.27% OIH 1.66%
– we think FAANG keeps up with market rally FB AMZN 0.29% AAPL 2.17% NFLX 1.46% GOOG 0.43%
And markets will be volatile. And the future is uncertain.
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26 Granny Shot Ideas:
26 Granny Shot Ideas: We performed our quarterly rebalance on 07/30. Full stock list here –> Click here
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POINT 1: Daily COVID-19 cases 102,108, down -8,317 vs 7D ago…
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Current Trends — COVID-19 cases:
– Daily cases 102,108 vs 110,425 7D ago, down -8,317
– Daily cases ex-FL&NE 96,469 vs 102,836 7D ago, down -6,376
– 7D positivity rate 6.4% vs 6.7% 7D ago
– Hospitalized patients 73,654, down -11.9% vs 7D ago
– Daily deaths 2,029, down -9.9% 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 102,108, down -8,317. As indicated by the negative 7D delta, 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
*** The CDC didn’t update vaccination data on Tuesday, so data is as of Monday
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Current Trends — Vaccinations:
– avg 0.6 million this past week vs 0.8 million last week
– overall, 55.0% fully vaccinated, 63.8% 1-dose+ received
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Vaccination frontier update –> all states now near or above 95% combined penetration (vaccines + infections)
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
– RI, MA, FL, CT, SD, NJ, IL, NY, DE, NM, UT, PA, ND, NV, KY, ND, CO, KS, TN, OK, WI, SC, AZ, MN, CA, NE, LA, DC, MT, AK, MD, ID, VI, AR, AL, MS, and NC 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. 90.5% 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 543,856 doses administered reported on Monday, down 16% vs. 7D ago. As a larger percentage of the population is now vaccinated, the vaccination trend is beginning to decrease. With booster shots becoming more widely available, we believe that the vaccination pace could once again pick up. 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 89.5%. And only 78.4% 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 97.8% of US states have seen 1 dose penetration > 50%, 81.7% of them have seen 1 dose penetration > 55% and 57.1% 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 ~5 for the past few days
– this means 5 vaccines dosed for every 1 confirmed case
In total, 394 million vaccine doses have been administered across the country. Specifically, 212 million Americans (64% of US population) have received at least 1 dose of the vaccine. And 182 million Americans (55% 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.
