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Monday
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SKIP THURSDAY
Friday
STRATEGY: Even as markets are skittish YTD, leadership is clearly cyclical = resolves to upside
Equities have been punishing YTD, but sector leadership is clearly cyclical
The best way to describe the first 25 trading days of 2022 is treacherous. On many fronts, we are facing inflection points on monetary policy, COVID-19, inflation, geopolitics, elections (mid-terms) and even general mood. So it is not surprising to see investors apply a “hair trigger” to stocks and markets. And naturally, conviction remains low. Of course, our base case for 2022 (from early Dec) was the 1H of 2022 would be treacherous, but this has been worse than we expected.
We will see 2022 being a double-digit gain year, and if historical precedents are to be respected, the 2022 gains might even by +13% to +15%, so above our S&P 5,100 target. But we just need to get through 1H2022.
– sector leadership YTD is clearly cyclical
– Energy outperforms by 2,804bp YTD, exceeding the 2021 outperformance already
– Financials is second best, outperforming by 940bp
– if a stagflation or even a recession were looming, this is not the sector leadership one expects
– thus, we view the 1H turbulence as “anxiety about inflections” more than looming disasters
If incoming data tracks this view, then all of this turbulence in 1H is merely created spooled up energy, for a more vigorous 2H.
…Fauci sees pandemic phase ending
Policymaker consensus is shifting rapidly and the headline below confirms what we are already seeing. Policymakers are seeing the pandemic phase ending in the US, and this should result in a broader shift in policies. Overall, this is a good thing. As the pandemic phase justified many restrictions, which in turn, contributed to the shortages creating the inflationary pressures we are seeing today.
– by contrast, other nations are still pursuing stricter policies
– Canada is an example
In fact, many states are now dropping mask mandates in schools. NY is the latest, following other “blue” (Democratic) states including NJ, CT, etc. This is also encouraging because the return to normalcy is arguably most important for students.
…could inflationary pressures already be apexing? would mean Fed needs to do less
I found David Rosenberg’s tweet, former Merrill Economist, interesting. He said the NFIB small business report from yesterday shows that wage and pricing pressures for small business are rolling over. This is quite a positive development if true.
– after all, if the rate of change is slowing
– inflationary pressures should be easing
– and in the words of Tom Luddy, “less bad is good”
David is known for good bottoms-up work. So, I feel confident sharing his insights. And his views are a contrast to consensus and pundits. I was speaking on a panel last week in Houston. And the other panelists were highly confident that the US was going to face a severe inflation issue.
– and that markets were “oblivious” to this risk
– in other words, the opposite of the insights shared by David below
And example of the more hawkish views. Take a look at a chart by Morgan Stanley, shared by @MichaelAArouet which shows the Fed funds rate versus YoY wages. And the implication from this chart is the Fed is way behind the curve.
– January CPI is going to be closely watched
– CPI is reported 8:30am ET Thursday
…But the issue with the US labor market is participation rate is lagging, especially compared to G10
Wages are rising in the US and that is the reason economists are saying the Fed has to act, as rising wages is a sign of a strengthening inflation trends. But as many are aware, the shortages of labor are not due to an actual shortage of labor:
– it is a sharp drop in participation rates
– many other nations are seeing participation rates recover to pre-pandemic levels
– but the in US and in Germany, these figures are lagging
– if policymakers shift away from pandemic planning
– perhaps we could see policies incent a return of eligible workers into the workforce
– early retirement might be a factor
– but in a world of inflation, those retired will not have enough saved
– inflation hurts savers and benefits borrowers
22% of the labor force is seeing +10% wage gains, but this 13% of total labor income
Wages are on the rise in the US. Our data science team, led by tireless Ken, listed the industries seeing 10%-ish wage gains. It is a large list.
– topping the list are service industries – accommodation, food services, auto dealers, etc
But this table below looks at the cumulative impact from these 10%-wage growth sectors.
– 22% of the labor force is seeing 10% wage gains, or 1 in 5 people
– this cohort is 13% of wage income
In other words, these are below average share of wages in general. This is consistent with what is well known. The best wage gains are among the lower tier of income earners. But this also suggests that the wage inflation risks are not as pervasive as one believes.
Tuesday close was strong and Mark Newton, Head of Technical Strategy, still expects further upside
Mark is encouraged by price gains Tuesday and he expects further follow through. A snapshot of his comments are below:
– basically, he sees S&P 500 moving towards 4,620 to 4,650 in the near term
– and would be dip buying into this period
– breadth has improved as well
– click here to learn more
REMINDER: Adam Gould, Fundstrat’s Head of Quant, is hosting a 2022 Outlook call Thu
Adam Gould is hosting a call Thu. Please tune in (register here). He will be talking about tracking social media scores, and other alternative data. In his most recent note, he is favoring the following factors shown below:
– OW Quality
– OW Low volatility
– Value over Growth
– OW Momentum
– click here to learn more
Reminder, after waterfall decline, history says +7%/ +13% next 3M/ 6M
Last week, we published some data around waterfall declines in equities. The S&P 500 posted a waterfall decline of 11% peak to trough over 14 days. On a closing basis, it would be a ~9% decline. While many things seem common in this pandemic era, a fall of this velocity is actually rare:
– foremost, it shows the fragility of confidence
– sort of flies in the face of those saying markets are in a bubble and investors are too bullish
In fact, in the past 10 years, this velocity of fall has only happened 5 prior times and these are shown below:
– 5 of 5 times, this was at the end of a sell-off
– not the start
– and markets staged a fierce and violent rally after each of these
Tireless Ken and the data science team compiled forward market returns, following 14D market declines. These are tiered below into deciles:
– the ~9% fall ranks as the “worst decile” since 1938
– the worse the 14D decline, the larger the bounce
– the relationship holds as we move down the deciles
– at the worst decile, forward 1M, 3M and 6M returns are very strong
– forward 3M and 6M returns are 7.1% and 13.0%
– this implies S&P 500 > 4,850 before 1H2022
– hence, this reinforces our view that markets can stage a strong rally from Jan lows into Feb
– but we believe 1H2022 remains treacherous
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 BITO GBTC BITW
– Energy
– FAANG FNGS QQQ
Combined, it can be shorted to BEEF.
– Homebuilders (Oct – Apr aka Golden 6 months) XHB
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Granny Shot Ideas: We performed our quarterly rebalance on 2/3. Full stock list here –> Click here
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POINT 1: Daily COVID-19 cases 178,605, down -84,442 vs 7D ago…
Current Trends — COVID-19 cases:
- Daily cases 178,605 vs 263,047 7D ago, down -84,442
- 7D positivity rate 15.0% vs 21.6% 7D ago
- Hospitalized patients 97,815, down -21% vs 7D ago
- Daily deaths 2,503, down -2.1% vs 7D ago
The latest COVID-19 daily cases came in at 178,605, down -84,442 vs. 7D ago. The 7D delta in daily cases has been negative in 19 of the past 20 days. The COVID-19 daily cases continue to retreat across the nation as all states reported a lower case figure yesterday except California, Montana, Idaho, Connecticut, and the US Virgin Islands. Similar to what we mentioned yesterday, these case rises are most likely due to some one-time data fluctuations. And we have not observed any trend reversal in daily cases for these states.
7D delta in daily cases has been negative in 19 of past 20 days…
The 7D delta in daily cases remains in the negative regime and the overall trend has been stable. This reflected the steady decline in daily cases. Over the past few days, the 7D delta has shrank slightly, but this is primarily because only a few states report COVID stats, and also the daily cases have fallen so much.
Only 5 states are still seeing a rise in cases while 45 states + DC are seeing cases falling…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling (or about to fall), 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
Daily deaths are still rising, while positivity rates and hospitalization are falling 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
- Net hospitalization started to roll over. And more importantly, the daily mortality did not follow the same pattern as hospitalization, which shows Omicron is less deadly compared to other variants (at least so far).
- Positivity rate finally started to fall after plateauing for two weeks. It also confirms the recent decline in daily cases.
POINT 2: VACCINE: vaccination pace has slowed recently… Still more than half of eligible people have not received their booster shots…
Current Trends — Vaccinations
- avg 0.6 million this past week vs 0.7 million last week
- overall, 27.6% received booster doses, 64.0% fully vaccinated, 75.4% 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 MS, WA, OR, TX, 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 517,481 doses administered, as reported on Tuesday. The improving COVID case trend across the nation may have influenced people’s desire and sense of urgency to get the booster doses. The vaccination pace has slowed from the recent peak of 2 million doses per day in mid-December to ~600,000 recently. This also coincided with the news reported on Monday by the NYT that JNJ paused its vaccine production late last year. According to the latest CDC data, within the 544 million doses administered in the US,JNJ vaccines only accounted ~3% (18 million). Admittedly, to be fully vaccinated, JNJ vaccine only requires 1 dose, vs 2 doses required by PFE and MRNA vaccines. But the relatively low number of vaccines administered (maybe due to the lower efficacy based on trial data?) and the slowing vaccination pace seem to play a role.
This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.
In total, 544 million vaccine doses have been administered across the country. Specifically, 250 million Americans (75% of US population) have received at least 1 dose of the vaccine. 212 million Americans (64% of US population) are fully vaccinated. And 91 million Americans (28% of US population) received their booster shot.
POINT 3: Tracking the seasonality of COVID-19
***We’ve updated the seasonality tracker to show figures from the last 9 months, from this calendar day, in each of the last two years***
As evident by trends in 2020 and 2021, seasonality appears to play an important role in the daily cases, hospitalization, and deaths trends. 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
– Opposite effects hold true in the winter
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.
