Fear and uncertainty building short-term, but case for equities in 2022 still intact

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SKIP MONDAY — President’s Day
Tuesday
Wednesday
SKIP THURSDAY
Friday

STRATEGY: Fear and uncertainty building short-term, but case for equities in 2022 still intact
Fear and uncertainty building short-term but so many resolved near term
In the first two months of 2022, a number of developments understandably rattled investor convictions and confidence around financial assets. One of the biggest lessons I learned at JPMorgan is the view “credit markets run on confidence, and they are good until they are not.” In other words, even the ever wise bond market itself relies on confidence to maintain its enormous liquidity.

To recap the “biggies” weighing on markets (our belief):

– inflation soaring = Fed behind curve
– interest rates rising = bond market outcry for a recession (save the complex)
– Fed hike = fear of regime change + fear of policy error
– Russia/ Ukraine = “sell the build up, buy the invasion”
– White House approval ratings low = turmoil = risk of steps to redirect

EXTRA CREDIT:
– “stocks expensive”
– “bull market historic”

This is quite a list of worries and explains why stocks are under pressure in 2022. But we also know that markets “climb a wall of worry” — this has not been the case for the past few weeks. For some time, we have talked about how many of these building headwinds are short-term, in our view, and would largely dissipate/fade before 1H2022. And thus, the set-up remains that we see equities as treacherous in 1H but stronger in 2H.

– we expected stocks to find some footing in February
– unfortunately, stocks have struggled mightily this month (except oil)
– there remains a narrowing window, so it’s not totally hopeless
– for reasons we discuss below, we believe risk/reward remains to the upside near-term

UK ending COVID-19 restrictions latest evidence COVID-19 taking stage “left”
I have been traveling in the past few weeks, visiting with clients and at various conferences. And anecdotally, I would guess roughly 25% of Americans still have a high level of COVID-19 vigilance — those taking mitigation steps, have anxiety that exceeds the current CDC guidance. So, while many in the general public think COVID is over, this is not the case with many that I have seen.

But the best evidence it is quickly ending is the latest move by PM Boris Johnson, who plans to end COVID-19 restrictions on 2/24, or this coming Thursday.

– recall, UK was criticized for not taking restrictive steps as Omicron raged
– but Omicron peaked quickly and faded as quickly as it appeared
– Queen Elizabeth tested positive, but this has zero impact on policy

…even as COVID-19 fades, the “unhinged behaviors” need to be corrected
This businessinsider.com article is a great illustration. Starbucks noted, according to this article, that customers have gotten more abusive and ruder since the pandemic. We all have noticed this. And the level of unhinged behavior is troubling.

– hopefully, this fades as COVID-19 anxiety fades
– question, what fomented this behavior?

Consumer spending has upside to recover…
And naturally, as COVID-19 restrictions and hysteria fade, we believe there will be additional upside to consumer spending. This is a good thing and also adds upside to the case for economic growth.

STRATEGY: 2014 Invasion of Crimea shows Ukraine stocks bottomed day of invasion = “buy the invasion”
Equities have not managed to rally in February and with 5 trading days left in the month, the probabilities are diminishing. The YTD chart highlights the struggles of equites YTD:

– Stocks tanked in January
– February saw a mid-month rally
– but the rally failed to breakout
– and stocks are still above the late January lows

So, stocks while in a short-term downtrend, are also still within a range. Our Head of Technical Strategy, Mark Newton, expects stocks to begin to rally sometime this week.

Russia – Ukraine dominated headlines this weekend
Over the weekend, the major development is the escalation of tensions with Russia-Ukraine. And as a consequence, equity futures are under pressure. While this certainly amplifies anxiety on an evening, with US markets yet to open, we think any “panic” around Russia-Ukraine will be short-lived. And hence, we would not be sellers on this panic.

…Few US companies have direct exposure to Russia
A conflict in Russia-Ukraine is bad news for the world. But the direct impact on US equities is likely to be more felt by:

– P/E contraction “fear”
– not by
– EPS

Below is a great chart by Citibank in 2014, showing US companies’ exposure to Russia. Few US companies have significant exposure to Russia and thus, sanctions will have less impact.

– again, the takeaway is Russia/Ukraine causes uncertainty
– Equity risk premia up, hence P/E derates

This P/E de-rating is arguably transitory.

…Russia-Ukraine crisis causing Fed hike probabilities to collapse
One wall of worry is appeasing another. Look at the estimated number of hikes for March 2022 FOMC:

– On 2/11, the market was pricing in 2 hikes
– it has since steadily fallen to 1.2 as of now

How can the Fed hike if asset prices are weakening and bond markets are seeing diminishing liquidity? In a way, this shows the Fed put threshold is a bit higher than many believe.

The diminishing odds of 2 hikes in March is actually “dovish” incrementally. And this does show that the Fed put might be at higher levels than consensus believes. The latest BofA Global Fund Manager survey shows this put is believed to be far lower (plurality is 3,750).

– ok, the diminishing odds of a hike is not the same as a Fed put
– but you get the point
– the worse the uncertainty around Russia-Ukraine
– the more likely the Fed will have less certainty to hike

So indirectly, this is a Fed put.

Ukraine stocks bottomed in 2014 on the day of the invasion…
It is not entirely clear what the endgame for this Russia-Ukraine conflict. And since markets do not like uncertainty, there is a considerable level of angst. But, again, we think the damage to markets will be short-lived. Last week, we highlighted that in the last 5 instances of “wartime” equities generally bottomed when “invasion started.” This is particularly true even in the case of nations directly involved in the conflict:

– check out Ukraine and Russia equities during 2014, during Russia’s Crimea annexation
– Ukraine stocks bottomed, to the day, on the invasion
– Russian stocks tanked, to the day, on the invasion

So it looks like markets actually punished the aggressor.

– we also show the largest stock in each country index
– same story

And even in 2022 so far, Ukraine equities are outperforming Europe (Eurostoxx 50) while Russian equities are underperforming.

– the nation launching tanks is seeing their local equity market tank
– why are Ukraine equities outperforming?
– we also show the largest stock in each country index
– same story

Overall this is consistent with what we have seen in the most recent wars. 5 of 5 times, the S&P 500 bottomed prior to the invasion.

– by this transitive logic
– the day Russia moves into Ukraine
– is likely the day global equities bottom
– the tension and build up into that event is the downside pressure

– PS: hopefully diplomatic measures work and we avoid military conflict

…a lot of bad news and pessimism priced in
Additionally, a lot of bad news and pessimism is getting priced in. Look at the trend in the put-call ratio for ETFs. This was shared by Helene Meisler @hmeisler and shows the 21-day moving average.

– put buying is the highest since March 2020

QUESTION: In March 2020, was it a good time to be buying puts and shorting equites?

– LOL
– Nope

If it was a bad time to short in March 2020, why is it a good time to be negative now?

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 -1.45%  GBTC -1.48%  BITW -1.31%
– Energy
– FAANG FNGS -0.66%  QQQ -0.25%

Combined, it can be shorted to BEEF.

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

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33 Granny Shot Ideas: We performed our quarterly rebalance on 2/3. Full stock list here –> Click here _____________________________

POINT 1: Daily COVID-19 cases 42,314, down -166,779 vs 7D ago…
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Current Trends — COVID-19 cases:

– Daily cases 42,314 vs 209,093 7D ago, down -166,779
– 7D positivity rate 8.4% vs 11.0% 7D ago
– Hospitalized patients 56,961, down -25% vs 7D ago
– Daily deaths 1,749, down -26% vs 7D ago
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In observance of the Presidents’ Day holiday, more than half of US states did not report COVID stats on Monday. For the 23 states/territories that updated their COVID-19 dashboards, a total of 42,314 new cases were reported. Except West Virginia, all of the other 22 states/territories reported a lower case figure. The “case rise” in West Virginia was also due to its recent change in dashboard update schedule. In fact, WV Gov. Justice on Monday discussed the possibility that West Virginia could “very soon” transition out of pandemic and into an endemic stage. So, the “case rise” should just be a data distortion.

As we noted last week, the Presidents’ Day holiday could cause data distortion in COVID stats, similar to what we have experienced many times over the past 2 years. Therefore, we might see a dramatic increase or decrease in case, death, and hospitalization data for some states in the next few days. That said, this is the first major holiday after many states lifted their mask mandate. Hence, the COVID trends following the holiday are also worth watching.

7D delta in daily cases has been negative for a month…
The 7D delta in daily cases remains in the negative regime and the overall trend has been stable. Due to the Presidents’ Day holiday, 7D delta has dropped dramatically on Monday (2/21). As a result, we are most likely going to see the 7D delta turns positive Tuesday. But as we explained above, the data distortion could last a few days and we will have a clearer view on the case trend by later next week.

All US states are seeing decline in daily cases now…
*** 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…

CDC has not updated its COVID vaccination tracker since Saturday (2/19) due to the Presidents’ Day holiday. Updates will resume on Tuesday (2/22).

Current Trends — Vaccinations:
– avg 0.5 million this past week vs 0.6 million last week
– overall, 28.3% received booster doses, 64.5% fully vaccinated, 75.8% 1-dose+ received

Vaccination frontier update –> all states now above 100% 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 above 100% combined penetration
– 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 520,049 doses administered, as reported on Saturday. The vaccination pace has slowed from the recent peak of 2 million doses per day in mid-December to ~600,000 recently. The improving COVID case trend across the nation may have influenced people’s desire and sense of urgency to get the booster doses. That said, as more and more states lift their COVID-19 restrictions, we believe vaccination remains a key to support us to smoothly transition back to “Normal”. Therefore, the daily number of vaccines administered is still one of the most important metrics to watch.

This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.

In total, 548 million vaccine doses have been administered across the country. Specifically, 252 million Americans (76% of US population) have received at least 1 dose of the vaccine. 214 million Americans (64% of US population) are fully vaccinated. And 94 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.