Fortunately, it was another good week for COVID-19 data prints. Even with a backlog of California cases polluting the data this week, daily cases are still down on a 7D basis.
A few clients asked us if the fall in cases is primarily due to falling testing. This is an argument put forth by some media outlets, and I disagree. Foremost, testing is a “pull” function, meaning few are subject to forced testing (essential workers, etc.). Thus, the only people seeking testing are: sick, in contact with someone who is sick, or testing due to work requirements. Also, the testing trend is overwhelmingly one directional.
On Wednesday, daily tests soared to their second highest level ever. And, importantly, positivity rates are collapsing and posted their lowest print since early June this week. Think about that. Positivity rates for the US are have been consistently below 10% for the past 3 months and are approaching 5%; a far cry from March highs of 30% – 40%.
Also of note is that testing in the worst hit areas, FL, CA, AZ, TX, or F-CAT has surged and the positivity rate is moving in the right direction: lower.
COVID-19 is a mysterious virus and developments on the treatment front warrant close watching. On Wednesday, Dr. Fauci cited a study that we had highlighted earlier this week suggesting that 50% of the US has T-cell immunity to COVID-19. This study matters for several reasons: T-Cell immunity can last decades. If 50% of the US has T-cell immunity, herd immunity could be reached at 1.25% – 2.0% prevalence. This would also reduce back-to-school and second wave risks.
Strategy: I see 150 points of upside in Epicenter stocks and am increasing my S&P 500 YE Target to 3,525 (+75). The rationale is straight forward:
– A new economic expansion underway, so it makes sense to be long equities
– Bond proxies/FANG are cheap at 25X-30X P/E vs investment-grade bonds which are around 52X. These Bond proxy/FANG stocks represent 74% of equity market cap
– If the “Epicenter stocks” return to Feb 2020 highs, that adds +150 points to the S&P 500. It is worth noting that these four sectors comprising “the epicenter” were already off their all-time highs.
If the S&P 500 re-attains its prior high set in February around 3,394, I think we will see a very fast move beyond 3,500. This would validate that a new bull market is underway, and bring themes and drivers related to “move assets back to America”
We have written extensively about the drivers for the epicenter stocks, and how a vaccine/cure would be a binary event. This week we highlighted some examples of the cost rationalization taking place. In short, epicenter companies are rationalizing a lot of costs and targeting lower “breakeven” levels. If demand recovers, I expect massive operating leverage to kick in and drive even greater profits.
In the table to the left, we highlight 20 stocks that our teams see as a trifecta. These stocks are rated OW (Overweight) by our Head of Global Portfolio Strategy, Brian Rauscher, our Head of Technical Strategy, Robert Sluymer and are in the top quintile of our DQM quant model.
This week, in many of our Zoom meetings, I sensed an elevated level of caution by investors. I am oversimplifying, but I get the sense that most investors see the equity ceiling as the Feb highs. At that level, most seem to become sellers. However, we several factors pointing to a top not being in: (i) investors are unusually cautious given markets are at new highs which is reflected in bearish AAII readings. This has generally not been a sign of a top. (ii) there is $4.5 trillion of cash on the sidelines, (iii) the economy bottomed and is expanding, (iv) the Fed is “easy”.
Could markets really be “topping” with ~$5 trillion on the sidelines? I don’t know if this ever happened. And with the Fed remaining dovish, I find it very hard to believe that stocks don’t have more room to run.
Bottom Line: I believe there are several catalysts that support a move well beyond prior S&P 500 all-time highs.
Figure Comparative matrix of risk/reward drivers in 2020
Per FSInsight
Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019
