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The biggest takeaway for me on events of this week? Convincing and arguably decisive evidence the “bottom is in” — the 2022 bear market is over.
- this was a big data week, with FOMC, 2Q GDP, housing and PCE (today)
- a huge miss on GDP, yet markets rally
- Fed raises +75bp and says focus remains on inflation, yet markets rally
- Russia turns down gas flow on Nord Stream I, yet markets rally
When bad news doesn’t take down markets, it is time for investors to assess.
- Is this a trap driven by short covering?
- Most investors take this view
- Has economy reached the pivot point where incoming data will be decisively less negative?
- This is our take and disinflation tailwinds strengthening
…This is the August 1982 moment, bottom is in but Fed is two months away from a pivot
As we have written about in multiple reports in recent weeks, we think this is turning out to the be August 1982 moment:
- During Volcker’s war on inflation, equities bottomed on August 1982
- this is two months before Volcker abandoned “anti-inflation” measures
- More importantly, stocks recovered the entire 36 month bear market loss in 4 months
- a mere 4 months
- in 2022, this means stocks could see “new highs” before YE
- yup, that is why we think S&P 500 could be >4,800 before year-end
EPS: Despite strong USD, global-oriented companies generate strong EPS growth
2Q GDP was the second consecutive negative GDP print, yet earnings are performing better than expected. As shown below:
- 40% of the S&P 500 has reported
- 71% are beating on EPS, and 72% of cyclicals are beating estimates
Despite a strong USD, EPS growth for global-oriented companies is >10% growth.
- this is impressive considering the headwinds of strong USD, bloated inventory, bullwhip effects
- and negative US GDP growth
- although those companies with higher US-rev share are only seeing 1% EPS growth
And reminds us that these companies have vastly improved operating efficiency during the pandemic. They are “unkillable” and inflation is a problem but they are managing well.
Another reason markets rally is the “negative tails” are being reduced
Multiple factors explain the recent market rally but perhaps one of the biggest factors is the fact consensus had been expecting a far worse outlook for the economy in 2H:
- hard landing as Fed is forced to crash economy to contain inflation
- inflation would be sticky so terminal rates would be higher than expected
- this is a negative for equities
- but as we noted market-based measures of inflation show markets see inflation being far less sticky
In fact, the comments below by Jeff Gundlach speak to this. He makes clear he does not see a “crash landing” and yet, the plurality of our clients expect a crash landing.
And this ties back to the market’s bias to see negative outcomes for markets. As shown below, there are 5 basic scenarios in 2022, and the Fed has stuck to the central case of a soft landing:
- recent data is confirming this central case is tracking
- while many investors and consensus see downside risk
- that is why investors have called for a “buyers strike” until S&P 500 falls to around 3,000
- but we believe a decisive bottom has been set
COGNITIVE BIAS: Investors see what they want to see
Over the past few years, we have highlighted that cognitive bias can make investors interpret events based on their own biases. In 2022, this is on ample display:
- inflation risks, either we have structural or more transitory inflation
- Fed is either overly hawkish or too dovish
- economic momentum is slowing or crashing
And these biases are built into our brain. Take a look at the 3 colored balls below:
- our brains see 3 colored balls
- red, yellow and blue
- unless someone is color blind (there may be fewer lines)
COGNITIVE BIAS: Markets see what they want to see
Zooming in, one can see that every ball is the same color:
- all balls are beige
- but like the above illusion, all incoming data is “colored” by our biases
- the signal from the markets, in our view
- is inflation risks are proving to be more transitory than many expected
COGNITIVE BIAS: Every ball is beige
INFLATION BIAS: Surveys show inflation a “political issue”
Even perceptions of inflation are subject to bias:
- U Mich survey also shows inflation expectations by political affiliation
- In past few years, Republican voters see far greater inflation
- Inflation expectations for the next year are >10% for Republicans and ~4% for Democratic voters
- 4% is the average value for Democratic voters since 2016
- There is no “inflation” issue arguably for Democratic voters
This is corroborated by Pew Research which shows inflation:
- issue for 84% of Republican voters
- only 57% for Democratic
And YouGov shows the same
33 GRANNY SHOTS: Updated list is below
The revised 33 Granny shots is shown below. The list on the table below is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear on at least two portfolios:
- AAPL in 5 of 6 portfolios
- GOOGL MSFT in 4 of 6 portfolios
- AMZN META in at least 2
- This reinforces our favorable view of FANG in 2H2022
33 Granny Shot Ideas:
Consumer Discretionary: AMZN, AZO, GPC, GRMN, TSLA
Information Technology: AAPL, AMD, AVGO, CSCO, KLAC, MSFT, NVDA, PYPL, QCOM
Communication Services: GOOGL, META
Health Care: ABT, BIIB, ISRG, MRNA, REGN
Consumer Staples: BF/B, MNST, PG, PM
We publish on a 3-day a week schedule:
Monday
SKIP TUESDAY
Wednesday
SKIP THURSDAY
Friday
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33 Granny Shot Ideas: We performed our quarterly rebalance on 7/12. Full stock list here –> Click here
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POINT 1: Total COVID-19 cases 848,551 over past 7D (avg 121,222 per day), up +1,858 (+265 per day) vs same period 7D ago…
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Current Trends — COVID-19 cases (past 7D vs. 7D prior):
– Total new cases 848,551 vs 846,693 7D prior, up +1,858
– Avg daily cases 121,222 vs 120,956 7D prior, up +265
– Hospitalized patients 39,722, up +4.9% vs 7D ago
– 7D Avg daily deaths 421, up +2.5% vs 7D ago
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Over the past week, a total of 848,511 (avg 121,222 per day) new cases were reported in the US, up +1,858 (avg +265 per day) compared to the same period 7 days prior. The overall COVID situation in the US has been in no man’s land. On one hand, the “highly transmissible” BA.4 and BA.5 variants now accounted for nearly all new cases in the US. On the other hand, the “highly transmissible” variant did not really cause the case, hospitalization, and even fatality counts to surge.
The 7D delta in daily cases tells the same story as it has been flat at zero over the past 10 days.
While current hospitalization is still rising at a slow pace, the daily deaths have barely risen. Given the low virulence (at least so far), we remain constructive that another full-blown COVID outbreak and health crisis is unlikely.
Ultimately, despite over 100k new cases reported each day, the impacts of COVID on daily life have diminished. COVID has become less important to average Americans compared to other topics such as inflation.
Below we listed the states with the largest increase or decrease in weekly new case counts. One thing that caught my eye was CA, NY, TX, and FL are among the states with the largest decline in COVID cases. These 4 states are also the 4 largest in terms of population and GDP. So few cases in these 4 states are good signs.
The health department of L.A. County in California earlier this week planned to resume its indoor mask mandate. Plans changed, however, as the overall COVID situation made drastic improvements. As a result, the L.A. County Health Department (after receiving many objections from local health authorities) decided to not impose the indoor mask mandate. This is a signal that COVID is becoming less of an issue as lockdowns are being met with resentment from people in the US.
Globally, it seems like the BA.4 and BA.5 are in full retreat now in Europe.
- Daily cases in LatAm are rolling over too.
- Asia still sees cases rise parabolically.
The daily cases in France have fallen over 50% from the recent peak over the past few weeks. Regarding fatalities, in both France and Germany, the scale of rise in COVID deaths relative to COVID cases seems to be in line with the previous Omicron’s subvariant earlier this Spring.
As we showed above, daily cases in Asia have been rising parabolically.
- Most of the new cases are from Japan and Korea.
- The death tolls in both countries also start to surge.
- In both countries, the case rises are still in the early stage and there have been no signs of a slowdown in virus spread.
POINT 2: VACCINE: CDC Updates Switch From Daily to Weekly
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Current Trends — Vaccinations:
– avg 0.3 million this past week vs 0.3 million last week
– overall, 33.1% received booster doses, 67.0% fully vaccinated, 78.5% 1-dose+ received
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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
The CDC has recently started reported vaccination statistics weekly, rather than daily, which is why the most recent data point shows 2.2 million doses given. Those 2.2 million doses were given over the last 7 days.
This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.
In total, 603 million vaccine doses have been administered across the country. Specifically, 260 million Americans (76% of US population) have received at least 1 dose of the vaccine. 222 million Americans (66% of US population) are fully vaccinated. And 110 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
