First Word

COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed "put". Daily cases up vs 7D ago, but still too early to conclude this is a new wave

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

STRATEGY: 4 reasons stocks still can go up ALOT.  Millennials + global labor shortage as important as Fed + fiscal policy
We have done a number of calls this week and two things seem to come up in each discussion.  These are fairly intuitive, but clearly on top of investor minds:

– First, whether markets have seen their highs for the year, given the upcoming headwinds of 2020 election uncertainty and heightened risk of second COVID-19 wave from the flu season.
– Second, where is the best risk/reward trade between now and year-end

Foremost, I think it is perfectly reasonable for any investor to be extremely skeptical about equities in 2020.  After all, we are in the midst of the worst Depression in 5 lifetimes, exceeding the Great Depression.  The world is dealing with the worst pandemic in 100 years, or at least 50 years (since 1967).  And the policy steps take to battle this tragedy have long term consequences.  And add in widening divisiveness in the US between Baby Boomers and Millennials, arguably even wider chasm than the growing divide between Conservatives and Liberals, and one sees why the “future is very very uncertain and scary.”

But I learned a long time ago that the stock market doesn’t care about my opinion and rather, my time is better spent trying to understand the message from the market.  And we think the underlying message is one that remains constructive.  That is, we think there are many factors that explain the extreme resilience of stocks in 2020.  We have written about these cornerstones in many of our recent commentaries, so I will not repeat all of them, but 4 factors really stand out to us:

#1: Don’t fight the Fed
Massive support from Fed and fiscal policy.  Even as a sole factor, this explains a lot.  Don’t fight the Fed.

– Yesterday’s Fed decision and forward-looking views underscore this — rates low for long

But this is not a sufficient explanation.  After all, look at the amount of money created by ECB and BOJ in the past 10 years and have very little to show for it.  The market is not completely fooled by this “sleight of hand.”


#2: “Stress test of 5 lifetimes” and equity now more valuable in capital structure
US corporates survived the most extreme stress test of any of our lifetimes, and their prospering during this time means equity risk premia is going to fall.  Moreover, within the capital structure, equity is proving to be more valuable in a time of stress than previously exhibited.

COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave
COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave





#3: The world more reliant on technology to offset labor supply contraction and US main supplier = tech to be 50% S&P 500.
Another key driver for US equities, in our view, is the world is facing a structural labor shortage.  This is something we have written about since 2018 (the first year this took place) and if the world has population growth exceeding labor supply, this output gap/ worker shortage is solved by increasing reliance on capital-based labor, aka Technology.

– see below, since 1930, the periods of US labor shortage (population growth > labor growth) has led to parabolic gains in Technology
– The US has been structurally short labor since 2015 — when did tech go parabolic? 2015…

COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave




#4: Millennials driving the US economy and their cohort does not peak until 2038…
One of the cornerstones of our research process is the belief that demographics and population trends influence economic and financial market outcomes (see tech discussion above as another example).  Millennials (those born between 1980 to 2000) are the single largest-ever generation in the US, surpassing that of Baby Boomers in absolute size by nearly 40%.  

– Below is a plot of the DJIA and we marked the actual year each generation peaked in total size
– Notice every major market top coincided with a generational peak
– Millennials are expected to peak in 2038

Hence, 2020 is probably the start of a new bull market that might last 20 years.

COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave




Where is the best risk/reward? Epicenter currently…
For some time, we mentioned that the stock market’s resilient recovery has been telling us a vigorous GDP and EPS recovery would be forthcoming and for the most part the market has been correct in suggesting this.  In fact, the ISM and strong recovery in housing point to this. And as COVID-19 has begun to organically retreat, we are beginning to see the start of a period of outperformance for the epicenter stocks (see below).

COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave



The chart below compares epicenter (SPHB) vs FANG (NYSE Fang+) and as you can see below, there has been choppy relative outperformance since the start of September.  The outperformance since the start of the month has been about 1,000 basis points.  The obvious concern investors have is that this is all a head fake.

COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave




_____________________________________

Tune into our webinar this Friday at 3:30pm ET with IHME head science researcher, Christopher Murray…
But the future is uncertain.  And we wanted to get the perspective of one of the leading COVID-19 healthcare researchers.  We are hosting a webinar with one of the founders of IHME (IHME website healthdata.org), you may know as healthdata.org, and is one of the forecasters for COVID-19 used by the White House.  We will be speaking with Christopher J.L. Murray who is the lead researcher there.  FYI, the IHME is forecasting a brutal flu season, with daily deaths rising to as much as 12,000 per day in December (peaked at ~2,000 in April 2020).

– this Friday at 3:30pm ET.  
– the time is odd but Murray of IHME is based on the West Coast

Similar to our broader work on COVID-19, we want to make this available to the public, so you are welcome to share this webinar invitation (except not to CNN).  The details of this webinar are below:

Details and Specifics
Date: Friday, September 18th, 2020
Time: 3:30 pm Eastern Time
Duration: 45-60 minutes (including live Q&A)

Link –>  Click here to register

  1. Registration is required to receive dial-in details.
  2. You will receive a copy of the presentation before the Webinar.  The call will be accessible via computer, phone or both. If you login, you can view the presentation during the Webinar.  If you call in only, we recommend having a copy on hand if possible.
  3. To request a replay of the call, please email inquiry@fsinsight.com.

Should you have any questions, please do not hesitate to contact us at (212) 293-7140 or email inquiry@fsinsight.com.

_____________________________________





POINT 1: US daily cases 36,932 up +6,795 vs 7D ago. It is still too early to conclude if this is a new wave or more “payback” due to the suppressed Labor Day week data.
Daily cases came in at 36,932 Wednesday, which is +6,795 vs 7D ago.  This is a break in the recent pattern, to the extent that instead of seeing daily cases down vs 7D ago, we are seeing a rise for the past three days.  As we wrote yesterday, there are two explanations for why we are seeing such large jumps. Either:

– cases are suddenly surging this week, due to back-to-school and Labor Day social gatherings, or
– case data was suppressed throughout last week due to the Labor Day weekend, and we are seeing “payback” this week


COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave


Source: COVID-19 Tracking Project


Next week will give us a clearer picture…
I don’t know which of the above explanations is correct.  So, we will need to wait until next week to see which of these is the correct explanation.  Good things so far are 1) the daily cases did not exceed the level two weeks ago; 2) the 7D delta of daily cases decreased from 11,687 (Tuesday) to 6,795 (Wednesday). As we move toward the end of the week, if the recent jump in daily cases is due to the understated Labor Day week data, we should see this 7D delta continues to fall.

Again, the daily change vs 7D ago, in our view, is the leading indicator as it is what influences the 7D moving average.  As shown below, the rise in daily cases vs 7D ago for the past three days is a reversal of the steady declines seen over the past few weeks. 

COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave


Source: COVID-19 Tracking and Fundstrat 


The states with the significant increase are CA, TN, IL and WI. Similarly, the rise in these states could stem from back to school or Labor Day social gatherings. But it is still too early to make the call. 

COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave
COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave
COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave




Source: COVID-19 Tracking and Fundstrat



POINT 2: County-level data shows that as much as 70% of the US has cases 75% off the peak
Periodically, we publish county-level data (Johns Hopkins data and cleaned up by our head of data science, tireless Ken).  County-level data is useful because we can track underlying trends more comprehensively.  The chart below is the % of the US that is seeing US cases 75% off their peak.

– this ratio’s 7D moving average reached a new high of 60% recently, surpassing the levels seen in June
– this organic retracement of cases (measured as % US 75% off the peak) is very promising
– hence, despite the daily cases remaining stubbornly high, this diffusion data on the county-level tells us COVID-19 still retreating

COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave



Source: Johns Hopkins and Fundstrat


Similarly, the patter of daily deaths is also improving.  This is tracking what % of US (based on county-level Pops) are seeing daily deaths below a specific threshold.  Extremely low levels of deaths is 2.1 daily deaths per 1mm residents.

– currently, nearly 70% of the US counties have daily deaths below this level, nearly a cycle high
– this 7D moving average is moving up sharply in recent weeks.

The bottom line, the organic trends at the county level is promising.

COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave


Source: Johns Hopkins and Fundstrat




POINT 3: Dr. Fauci takes Vitamin D supplements — please take your Vitamin D
Many of our clients are aware that we are big advocates of the importance of vitamin D, as we highlighted multiple studies showing how low levels of vitamin D seem to be associated with more severe risks for COVID-19.  Moreover, we found several studies that show many US cohorts suffer from low Vitamin D, such as Latino and Blacks and this could explain why COVID-19 severity seems much worse.

We wanted to share this CNBC interview with Dr. Fauci and he commented that he takes 2 supplements daily.  Vitamin D and C.

COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave
COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave


Source: CNBC


The article also cited a University of Chicago study which found that those with low Vitamin D levels are twice as likely to catch COVID-19.  Vitamin D boosts the immune system, so this would be a logical connection.

COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave
COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave



https://news.uchicago.edu/story/vitamin-d-deficiency-may-raise-risk-getting-covid-19-study-finds


I recently got my vitamin D levels tested.  The screenshot is below. 

– low is a reading of 20 or lower
– I am barely sufficient at 25
– I need more sun or need to eat more salmon


COVID-19 UPDATE: Stocks still a solid risk/reward beyond just Fed put. Daily cases up vs 7D ago, but still too early to conclude this is a new wave

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