The Biden Administration has announced it now has enough vaccine supply for all Adults by the end of May. This moves up the re-opening timeline and is very positive. The pace of vaccinations is also dramatically increasing. There was an average of 2 million doses given this past week. 8.3% of Americans have two doses and 16.2% have received their first dose. These figures are set to exponentially increase.
Daily cases are down almost 12,000 from 7 days ago which means it looks like its accelerating to the downside. The 7D positivity rate has also dropped below 5%, which we consider majorly positive. Daily death, importantly, have also dropped by nearly 18%.
Right now, about 14 million Americans are being vaccinated every week which comes to about 50 million a month. The J&J vaccine has made the supply picture significantly rosier. We could get up to 20 million doses a week, or maybe even 30 million. If we get to this pace, you can expect a lot more states to begin re-opening. We understand the Texas re-opening decision is controversial, but if the vaccination pace continues, we think more and more states will likely follow suit.
We still see a substantial perception gap between policymakers/media and the realized COVID-19 data. We suspect that as this gap continues to close it will be a highly positive force for the price of risk assets. In addition to this, the market sentiment this week certainly didn’t feel like the base case of most economists is a robust and frankly unprecedented boom.
JPM’s Chief Economist Bruce Kasman has recently predicted that US growth will exceed what has recently been seen in China. So, we think the volatility and market turmoil has distracted a lot of investors from the underlying bullish shift in what is rallying on ‘risk-on’ days and what is getting sold on ‘risk-off’ days. For the past 10 years Tech was bought as part of the ‘risk-on’ trade and it worked well. Now, as the market focusses on re-opening, despite the volatility associated with the market high-flyers, cyclicals and ‘Epicenter’ sectors have actually gone up despite what happened to the indexes. Yup.
As you can see below, despite the carnage in markets in the past few weeks associated with inflation fears and expectations of preliminary tightening by the Fed, cyclical sectors that we believe will outperform during re-opening have had a vastly different course than the rest of the index. One of our favorite sectors for the year, Energy, is up about 10 times more than the S&P 500 YTD, so we think the FOMO that occurs as institutions chase the returns that they are missing out on will push prices even higher. Especially since the supply/demand picture is supportive of further gains. We think you should be OW Energy if you are not already.
The question is whether this recent change in what’s getting bought and sold on risk on/risk off days has legs and will endure. We think it will. It has become a tale of two markets where Epicenter/Cyclicals rally while the crowded trades in Growth suffered. This is intuitive since Growth is more sensitive to rising rates. We also think investors are realizing the upside potential in the cyclical trade as we approach re-opening and are selling their Growth names to get exposure. So, the takeaway from this week is that you should still be adding to Cyclical Exposure in our opinion. It is now Cyclicals, not growth, holding up well during corrections!
However, the current sell-off in Growth is likely overdone. We think there’s a better than even chance (51%) that the Technology sector has made its ‘local’ low for 1H2021. For context, as you know, we’ve been urging our clients to OW Epicenter stocks in 2021 with a particular focus on Energy. Nearly half of our last 40 daily notes have had the strategy focused on Energy. We have also written we were much less enthusiastic about crowded ownership in Growth.
However, given today’s market carnage (and subsequent impressive recovery) we think a lot of Technology stocks are now attractive buys. The Nasdaq was about 13% off its highs and Technology stocks were being fire-sold. In fact, Ark Investments which is comprised of the hottest and highest multiple Growth names was down significantly more than that. So much at 33%, in fact, that it appears to us very likely that the bottom is in for the latest wave of selling, at least the disorderly and frantic selling that occurred this week.
This was a scary week for equities but we’d point out that our core reasons for owning ‘Epicenter’ are still strongly in place. We would also point out that that market showed a great deal of strength today and ended a very tough week on a very strong note. In a contrarian way, the market carnage that occurred is a positive as it de-levers market participants and paves the ways for moves upward.
The market action in names like ARK suggest to us that the bottom is in. If your familiar with Tom DeMark’s counter-trading system, you’ll see that the set-up looks positive. We encourage equity investors to have patient hands. We suspect those of you who used the down-days to add to good positions ended up happier than most this week!
Bottom Line: We think ‘Epicenter’ and Cyclicals will lead the market higher. Growth has likely bottomed for 1H2021. Vaccination progress forces focus on re-opening.
Figure: Way forward ➜ What changes after COVID-19
Per Fundstrat
Figure: Fundstrat Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019
