COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000

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

STRATEGY: Growth underperformance since September is the largest since 2006
Equities managed a positive close on Wednesday’s trading, a good sign, particularly considering equity futures were down nearly 1% overnight.  I will always view a -1% overnight to a positive close as a win.  Talks of potential progress on a US stimulus package were helpful, but this also a reminder that we are in a favorable seasonal period and strong markets finish strong = December rally.

We think one of the most important questions in 2021 is whether sufficient structural factors/changes have taken place in 2020 to justify a period where Epicenter (aka Cyclical stocks aka Value) can durably outperform Growth.  Take a look at the relative performance of Growth (Russell 1000) and Value since 2006.  The red line, Growth, has been pretty much straight up, except for a brief wobble in 2008 (July to Nov).  

– But in the past 3 months, we have seen a 900bp underperformance (vs R1K index).
– This is BOTH the fastest underperformance and the largest underperformance in 14 years

And this bears quite a lot of importance in 2021. 
– Is this 900bp underperformance merely a minor counter-fractal in a larger horizon of Growth continued dominance?
– Or are we seeing the start of a 14-year cycle of Value leadership?

COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000
Source: Bloomberg



Over the next few weeks, we will continue to come back to this key issue.  There have been many ‘false dawns’ of Value leadership, and we have certainly been guilty of expecting this turn to happen multiple times over the past few years.  So we are naturally less confident in trying to judge this too early.  But consider the following possible factors:

– Post-pandemic shift to de-urbanization is also an “asset heavy” (buy houses, cars etc) shift –> Value leads
– Pandemic drove cyclicals to re-engineering costs and processes –> operating leverage –> Value leads
– Massive amount of monetary easing –> risk of inflation rising –> Value leads
– Cyclicals have proven unkillable –> lower equity risk premia –> P/E go up

So you can see, there are some factors at play that argue for Value to outperform.  Perhaps this will only be early-cycle reason (12 months) but with a free call-option on this being a 10-year cycle.



Growth vs Value is like the Hatfield vs McCoy
If investors decide to tilt towards Value (aka Epicenter aka Cyclicals), there is a pretty sizable market cap shortage.  We have written about how about 75% of the S&P 500 is Growth/Defensive and about 25% is Epicenter/Cyclical.  Thus, there is a 3:1 mismatch if investors make a sustained shift towards Cyclicals.

And this difference is also evident when we look at the sector weighting differences in the Russell 1000 Growth and Russell 1000 Value index.  The left is Growth and the right is Value.

– Technology and Healthcare is 52% of Growth versus 25% in Value
– Energy/Materials are non-existent in Growth and 6% in Value
– Financials are 2.6% in Growth and 15% in Value

You get the picture.  For an investor to shift preferences from Growth to Value is like someone:

– switching political parties
– Hatfield vs McCoy
– Los Angeles vs rural Midwest
– In-n-out vs Shake Shack
– NY-style pizza versus Chicago deep dish
– Darth Vader vs Obiwan Kenobi

After all, Growth has worked for 14 years and it has made careers.  And the S&P 500 has flourished because of the addition of Growth companies, FANG, which did not even exist pre-1996.  So there is always going to be plenty of outperformance of reasonably priced growth companies.

COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000


Source: Fundstrat and Russell Investments



Epicenter superior total return = EPS surprise+ P/E re-rate… double whammy
We think the upside for Epicenter stocks is coming from:

– EPS surprise (re-opening + operating leverage)
– P/E expansion (unkillable)

So there is not necessarily a trade-off between “E” or “P/E” and also a reason we think the 2020 price highs are an ‘artificial constraint’ for Epicenter stocks. 


The drastic difference in sector weightings if Russell 1000 Manager decides to wear “Value” strips…
But consider the potential massive inflows into epicenter equities.  We illustrate by looking at how much a Russell 1000 Index manager would need to increase holdings of each of the 11 major sectors (GICS 1).  Tireless Ken, our data scientist, did these calculations:

– The biggest decline in holdings would be a 57% and 39% drop in Technology and Discretionary
– 49% and 44% rise in Energy and Financials holdings

Is it any wonder that we have seen Energy and Financials surge in the past few weeks?  As we mentioned a few times, the rise in Epicenter stocks seems like “baby steps” if the above arguments are true.

COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000


Source: Fundstrat and Russell Investments


Anecdotally, we are finding rising skepticism of the timeline for a US vaccine, which also means, rising skepticism of an economic re-opening.  There are many reasons for this:

– Washington quagmire on stimulus
– Wave 3 cases
– Soft lockdowns = further weakness
– Continued election challenges

And as such, investors are hesitant to embrace the “economy re-opening” trade, aka Epicenter stocks.  In fact, this is the reason this tweet by Nate Silver rang true for me.  As he comments, he thinks people “aren’t optimistic enough”

COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000


Source: twitter.com


The good news is that former President Obama has publicly stated he is willing to take the COVID-19 vaccine.  And this surely will improve confidence to trust the vaccine — recall, NY Gov Cuomo publicly expressed skepticism about this vaccine effort.  Moreover, many minority communities have been reluctant/skeptical of the vaccine. So this is a positive development.

COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000


Source: CNBC


Wave 3 is still underway in the US.  And after a short respite, daily case trends are again worsening. CA even reported >20,000 cases, the highest figure for any state, on an absolute basis.  The interesting development in Wave 3, is that the earliest states at the heart of Wave 3, WI, IL, ID, ND, SD, UT, or WIINSU, are seeing daily cases rollover:

– See the red line states?  Those are daily cases per 1mm for WIINSU, they are rolling over
– the surge is now in Wave 1 and to a lesser extent, Wave 2 states


COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000


Source: COVID-19 Tracking and Fundstrat    


So for now, everyone needs to stay vigilant!




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: ACM, AGCO, AN, ASB, BBY, BHF, BK, BOH, BWA, CF, CFX, CPT, CRI, CSL, DAL, DOV, DRI, EMR, EOG, F, FITB, FL, FLS, FNB, GE, GM, GPC, GPS, GRMN, HAS, HFC, HIW, HLT, HOG, HP, IBKR, IEX, JBHT, JBLU, KIM, LB, LEG, LUV, LYB, MAR, MGM, MIDD, MLM, MMM, MOS, MPC, MTG, NCLH, NEU, NNN, NOV, NUE, NVT, NWL, NYCB, OC, PB, PBCT, PHM, PII, PNFP, PNR, PSX, PXD, RCL, RS, SBNY, SBUX, SIX, SLB, SNA, SON, STL, STOR, SYF, TOL, TPX, UBER, UNP, VFC, VNO, WAB, WBS, WH, WTFC, WYND, XYL

Biden White House vs. Trump White House:
Full stock list here –> Click here

ADDENDUM II : Did you miss our Webinar on Nov 19? We had the big guns, including David Zion, of Zion’s Research
We had a great line up and discussed a lot of things between now and year-end.  Here are the replay links:

– Replay –> 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 192,879, +12,004 vs 7D ago… Holiday-related “rollover” ending
The latest COVID-19 daily cases came in at 192,879, + 12,004 vs 7D ago. 

– For a stretch of 5 days, daily cases were down vs 7D ago, but this has reversed
– The drop in cases in the past week reflected, in part, holiday-related closures
– And with social gatherings during Thanksgiving, we expect cases to start rising

We won’t have a clearer picture of COVID-19 trends until after this “payback” period ends, which is in a few weeks.  This is not that different than the distortions seen after Labor Day weekend.

COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000


Source: COVID-19 Tracking Project  and Fundstrat


7D delta at +12,004, ending the 5 day stretch where cases were declining…
Again, the daily change vs 7D ago, in our view, is the leading indicator as it is what influences the 7D moving average. 

– The 5 day stretch of falling cases ended
– Ex-CA, daily cases are slightly better, but still rising


COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000
COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000


Source: COVID-19 Tracking and Fundstrat  


COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000
COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000


Source: COVID-19 Tracking and Fundstrat  


COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000


Source: COVID-19 Tracking and Fundstrat








POINT 2: Wave 3: Still waiting for a peak but early Wave 3 states rolling over…
Wave 3 is still underway in the US.  And after a short respite, daily case trends are again worsening. CA even reported >20,000 cases, the highest figure for any state, on an absolute basis.  The interesting development in Wave 3, is that the earliest states at the heart of Wave 3, WI, IL, ID, ND, SD, UT, or WIINSU, are seeing daily cases rollover:

– See the red line states?  Those are daily cases per 1mm for WIINSU, they are rolling over
– the surge is now in Wave 1 and to a lesser extent, Wave 2 states


COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000


Source: COVID-19 Tracking and Fundstrat   


If the Wave 3 states are seeing a rollover in cases, albeit from astronomically high levels, this also gives us a template to see how the rest of the US fares.  The biggest surge in absolute cases is in CA.  The chart below is showing daily cases, on an absolute basis, and as you can see, CA is reporting a massively high number of cases.

COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000



Source: COVID-19 Tracking and Fundstrat    





POINT 3: For reasons not entirely clear, the Latino share of cases is rising again
Earlier this year, we had written several commentaries noting Latino’s surprisingly high share of COVID-19 cases.  As the chart below highlights, this peaked at nearly 47% by mid-June before tumbling.

– however, as Wave 3 unfolds, it looks like the Latino share of cases is rising again

COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000

Source: State agencies, CDC, COVID-19 Tracking Project and Fundstrat



Latinos are 16% of the US population, thus, at 22% and rising, their share of COVID-19 cases is high and rising.  There have been many attempts to explain the relatively high share of Latino COVID-19 cases.  Some suggest it is:

– occupational (essential workers), 
– economic (the type of housing and multi-generational)
– health (more likely to have underlying conditions)
– nutritional (Vitamin D deficiency)

I am not entirely clear myself on the causes for this high share and rising.  

COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000
COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000
COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000


https://news.miami.edu/stories/2020/11/research-shows-covid-19-has-hit-hispanic-communities-hard.html



Below is the current Latino share of COVID-19 cases, by state.  And even now, at the top of the list are states hit hard in Wave 1 (NY tristate) and Wave 2 (F-CAT):

– 50% and 46% of CA and TX cases are Latino
– Rhode Island and Connecticut, which are seeing a huge surge in cases, have 31% and 29% of cases Latino
– The exceptions to this are states getting hit the hardest in Wave 3 (red states) which have a relatively lower share

COVID-19 UPDATE: Growth underperformance to Value is sharpest and fastest since 2006. COVID-19 daily cases nearing 200,000


Source: State agencies, CDC, COVID-19 Tracking Project and Fundstrat

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