Click HERE to access the FSInsight COVID-19 Chartbook.
We publish on a 3-day a week schedule:
Monday — NO REPORT 6/20 — Juneteenth
SKIP TUESDAY
Wednesday
SKIP THURSDAY
Friday
No bid
Equities have suffered an utter meltdown in the past week as the hot inflation implications of U Mich and CPI pushed stocks into “no bid.” There are many explanations offered for this, but the ultimate takeaway is that equities are in the midst of liquidation. As @jasongoepfert of Sentiment Trader notes:
- 5 of the last 7 days have seen 90% of S&P 500 stocks fall
- “Since 1928, there have been exactly 0 precedents”
Rigged Pachinko — “heads I win, tails you lose”
Inflation has become the singular focus of markets. And the challenge for investors and markets is that the path of inflationary drivers from supply chains, consumer demand, war outcomes, labor markets are uncertain.
And given the cumulative uncertainties, markets have increasingly viewed the Fed as the single most influence on future outcomes. That is, markets have essentially assigned zero probabilities to “right tail” events (these challenges resolve without Fed intervention).
- this focus on “left tail” outcomes means investors generally view every data point as supporting Fed needing to tighten monetary policy
- a “heads I win, tails you lose”
Equities have become capitulatory
Bottoms are dangerous. This is also why investors remain hesitant to take risk. Witness the ugly reversals of the last few days. But as Mark Newton, Head of Technical Strategy of Fundstrat notes, signs of “capitulation” are growing. He details these in his Technical commentary.
…most “eye catching” is 2% of S&P 500 is above the 50D moving average, vs 1.2% seen at prior lows
But the most eye catching, is the fact that only 2% of the S&P 500 is trading above the 50-day moving average. Think about this:
- only 9 stocks are trading above their 50D moving average
- In March 23, 2020 (major low) and December 24, 2018 (major low), this figure was 1.2%
- another 4 stocks need to fall below respective 50D and this matches capitulatory lows of 2020 and 2018
- JUST 4 STOCKS
- NOT 50, NOT 20, NOT 10… 4
These are the 9 stocks that are still managing to trade above their 50-day moving average. The strongest is 7% and the weakest are less than 1% from falling below:
- Fedex FDX +7% (>50D)
- Dominos Pizza DPZ +4%
- Phillips 66 PSX +3%
- Monster MNST +1.5%
- Catalent CTLT +1.0%
- IBM IBM +0.8%
- Waters WAT +0.2%
- Dollar General DG +0.08%
- Exxon XOM +0.03%
If we are being overly “theoritical” and want to trigger machine nirvana, 4 of these 9 stocks needs to fall below their 50-day.
- 5 of 9 of these names need to fall <1% and they are below their 50D
- of course, this is “closing lows” and needs the rest of the market to stay low
- but you get the picture
13% of S&P 500 is >200D moving average
Many investors prefer to look at the 200-day moving average and this figure has fallen to 13%. This is not nearly as low as prior lows:
- March 23, 2020 was 3%
- December 24, 2018 was 8%
- Another 5% is 25 S&P 500 stocks need to fall below their 200D
- So, a slightly higher figure needed
13% is a bottom 5-percentile reading
This 13% figure ranks as a bottom 5-percentile reading since 1994. So in the past 30 years, this is a rare reading:
- Equities are higher 6M forward 80% of the time
- Median gain is +15.5%
This 13% figure ranks as a bottom 5-percentile reading since 1994. So in the past 30 years, this is a rare reading:
- Equities are higher 12M forward 90% of the time
- Median gain is +26.2%
So even if stocks are not at the same lows in March 2020 and December 2018, they are close.
Many investors say the “playbook” for the last 40 years doesn’t matter, as this is an inflation world
But many investors tell us the last 40 years of market history are not relevant as the Fed is fighting inflation. This is becoming a widely held view, but this will only prove to be true if inflationary pressures linger in the same way this plagued markets from 1960s to 1980s. While markets seem increasingly confident of this, inflation has only been rising for the last 18 months and the Volcker moment was more than a decade in the making.
The 2-year remains best indicator of stance of monetary policy
Many well known Fed watchers from Jeff Gundlach of Doubleline to many economists cite the 2-year Treasury yield as the best barometer for monetary policy. Note this comment from Tim Duy of SGH Macro Advisors:
- “While all of us may understand the Fed’s claim that the two-year Treasury rate is the best indication of the stance of monetary policy…”
- “…that’s a harder story to sell to the public and Congress”
- Tim was making the point one of (many) reasons Fed needed to accelerate hikes was optics
The 2-year has round-tripped to “shock CPI” Friday levels
Take a look at the 2-year yield below. Yields have round-tripped to levels on 6/10/2022 close which was the day before the “shock CPI and U Mich survey”
- after surging from 3.06% to 3.45% on 6/14
- 2-year yields are back to 3.09%, or a virtual round-trip
- but yields were <2.9% on 6/9
After June hike, Fed is far less “behind the curve” — meaning less urgency for Fed to “shock markets”
The fall in the 2-year yields and the rise in Fed funds rate has narrowed the gap between 2Y and FF:
- this spread is now 1.47%
- this was 2.6% prior to FOMC decision, which is viewed as “Fed far behind the curve”
- At 1.47%, spread is back to levels seen on March 8, 2022
- Recall, in March 8, 2022, financial markets were far less fearful Fed needed to “shock markets”
The key point, in my view, is that the Fed has gained optionality by being less behind the curve:
- Markets are not pushing Fed to accelerate to same extent
- Fed has noted neutral rate is 2.5% and 2-year is already above that
- If inflationary pressures cool, there will be less urgency to “shock”
- Consensus is looking for +75bp in July and +50bp in Sept, or 125bp total
- If 2-year holds here, this will further shrink spread to 20bp
For what it’s worth, when 2Y less FF is this wide, equities tend to perform better
Since 1982, or the last 40 years, a wider 2Y less FF is generally associated with better forward equity returns. The scatter is shown below:
- the wider the spread, the better forward return for equities
- there are wide outcomes, but the implication, in our view
- is wide spreads lead to Fed moving to “shock” markets ala 1994 and 1982
- and these stocks establish equity lows
Rents starting to ease in major cities, implying “services” inflation not necessarily accelerating
The Cleveland Fed Inflation Nowcasting shows June Core CPI is tracking towards +0.49% and +5.66% YoY.
- this is slight improvements from May’s Core CPI +0.5% and +6.0%
- but this is not tracking for meaningful improvements just yet
One of the biggest negative surprises in the May CPI was “shelter” CPI which came in strong at +5.5%. YoY
- Shelter is 32% of the CPI basket, as shown below
- 3 major components
- Owner’s equivalent rent is 23.8%
- Rents paid is 7.3%
- Hotels (aka shelter away from home) is 0.9%
This message from Michael (anon) caught my eye. He noted that rents for 1 bedroom apartments in Williamburg, NY have tanked:
- Williamsburg is a very hip area in NYC
- home to many younger adults and start-ups
- tanking rents likely reflects the implosion of start-ups and crypto in that area
- this is an extremely coveted area, so the drop in rents is eye catching
- and in such a short time
It turns out that rents in 7 of the 9 major cities below are declining or peaking. Take a look below:
- Boston and Miami clearly falling
- Detroit and Minneapolis in downtrends
- San Diego, Los Angeles, Salt Lake City are rolling over possibly
- Only NYC and SF are still rising
I am not the person compiling CPI. But this is a common sense and real world measure of rent trends. And this shows that rents are not rising:
- economists are most fearful of “sticky inflation”
- services components such as rent and housing are seen as low inertia/sticky
- this points to the possibility these are not that sticky
- but rents reprice slowly and these are “marginal” rents paid by new tenants
- so it could take time to show up in CPI
Housing continues to cool and there are many anecdotes. But look at the latest Redfin data showing a jump in active listings with a price drop.
- this figure is nearly 6%
- Redfin notes this is a seasonal record
- US housing starts also fell short of consensus
- +1.549 million vs Street at +1.693 million and +1.724 million in April
- According to NARE, each new start creates 4 full-time equivalent jobs
- the drop of ~175,000 starts means roughly 700,000 jobs lost in associated housing (construction, etc)
- Of course, this is annualized data, but you get the picture
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31 Granny Shot Ideas: We performed our quarterly rebalance on 4/5. Full stock list here –> Click here
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POINT 1: Total COVID-19 cases 701,186 over past 7D (avg 100,169 per day), down -16,729 (-2,390 per day) vs same period 7D ago…
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Current Trends — COVID-19 cases (past 7D vs. 7D prior):
– Total new cases 701,186 vs 717,915 7D prior, down -16,729
– Avg daily cases 100,169 vs 102,559 7D prior, down -2,390
– 7D positivity rate 11.6% vs 9.5% 7D prior
– Hospitalized patients 26,456, up +4.0% vs 7D ago
– 7D Avg daily deaths 295, down -24% vs 7D ago
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Over the past week, a total of 701,186 (avg 100,169 per day) new cases were reported in the US, down -16,729 (avg -2,390 per day) compared to the same period 7 days prior. There have been two weeks following the Memorial Day holiday, and we have yet to see any sign of surges in COVID cases, hospitalizations and deaths. Instead, overall new cases actually have fallen over the past week.
The 7D delta in daily cases has been negative in 7 of the past 9 days. Although the 7D delta has been fluctuant and will continue being fluctuant for a while given two federal holidays in the next three weeks, the overall trend remains promising.
Moreover, current COVID hospitalizations have shown signs of apexing. Even the mortality trend, that we presumed would follow the rises in cases and hospitalization, remains essentially flat.
At the state level, Northeastern states have seen both cases and hospitalizations rollover. New York, New Jersey, and Massachusetts are among the states with the largest decline in cases.
South Central and Mountain States are the two regions where cases are broadly ticking up – especially in Colorado and Wyoming. While it seems the seasonalities play a role in the case rises in these two regions, if they follow the pattern of Northeast states, the case rise could be mild and roll over in 3-4 weeks.
As you can see from the weekly COVID cases table below, we now see over half of US states with lower weekly cases (the ones highlighted in light blue).
POINT 2: VACCINE: vaccination pace has been up recently…
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Current Trends — Vaccinations:
– avg 0.3 million this past week vs 0.3 million last week
– overall, 31.9% received booster doses, 66.6% fully vaccinated, 77.7% 1-dose+ received
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On Wednesday, an FDA panel voted unanimously in favor of recommending the Pfizer-BioNTech and Moderna vaccines for children as young as 6 months. The FDA, which often follows the decision of the panel, seems poised to authorize the vaccines for emergency use in the youngest age group. Currently, the approximately 20 million children under age 5 remain the only group ineligible for the COVID vaccine. Once the FDA has authorized the vaccines for emergency use, the decision moves on to the CDC, whose advisors and director must also vote on whether to recommend the vaccines for this age group. The CDC’s advisers are expected to vote Saturday. States have begun ordering doses, and White House officials said vaccinations could start as early as next week.
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 576,241 doses administered, as reported on Wednesday. The vaccination pace has started to level off after a brief pickup in mid-March.
This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.
In total, 591 million vaccine doses have been administered across the country. Specifically, 258 million Americans (76% of US population) have received at least 1 dose of the vaccine. 221 million Americans (66% of US population) are fully vaccinated. And 106 million Americans (31% 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
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, southern states are not showing as much of a spike as other states. This could be attributed to spring weather in the south encouraging more outdoor activities.
CASES
HOSPITALIZATION
DEATHS
