Leading Econ. Data Accelerating, COVID-19 Decline Continues

Yesterday, the major cruise lines announced plans to resume Alaska cruises this summer. This a major positive development for Epicenter stocks and the economy as a whole. There are two factors that supported the resumptions. The US Senate passed the “Alaska Tourism Restoration Act” which allowed US cruises to skip Canadian ports and the CDC eased rules regarding masks for fully vaccinated Americans. This another major step towards enabling the US economy to return to normal. And again, is a positive fruit of the abrupt easing pursued by the CDC and White House.

The latest COVID-19 daily cases came in at 37,621 down -8,300 vs &D ago. The US continues to see a persistent decline in daily cases. The daily new cases have been down 30,000 to 35,000 in the past five weeks. If the speed of this decline persists, we could see the daily cases drop to below 10,000 before the beginning of June. Current hospitalization, daily deaths and positivity rate are all approaching their all-time-lows since the start of the pandemic. After a mini-surge in March the amount of hospitalized patients has begun to roll over again. On a bright note, cases seem to be largely rolling over in India as well even as necessary amounts of vaccine remain elusive in that nation.

The persistent path of pace decline suggests that like Israel, the elevated level of vaccine penetration is causing a sustainable collapse in cases. Currently, all states are very close to the combined level of previously infected and vaccinated surpassing 70% of the total population. This is a major number that we see as critical for reaching a level of immunity that results in a sustained decline in cases. RI, SD, MA, ND, CT, NJ, NY, IL, UT, MN, NM, NE, AZ, and PA are now about 90% combined penetration and thus immunity. So, gradually, the US is getting to that threshold that will presumably result in herd immunity. The primary threat to this occurring is of course if a vaccine-resistant variant begins offsetting the considerable progress made to this point.

On Thursday there were a total of 2,078,652 doses administered which was up about 7.8% from a week ago. After a mild rebound following the re-approval of the J&J vaccine the pace of vaccinations has entered a downtrend. Looking forward, the recent CDC’s removal of restrictions for the fully vaccinated could encourage more to seek their shot. We believe it is therefore possible that we see a renewed surge in vaccinations. Though, as we said, in some states levels of immunity are quite high when added to those previously infected.

STRATEGY: Wall of Worry Has Scaled to Great Heights

Stocks have been rangebound for the past month. The S&P 500 has fallen into 2 rangebound periods. With a lower range set up over the past week. But why have stocks languished? We are not entirely sure, but we have heard myriad reasons for concerns from our institutional clients. Some think stocks are extended and just generally wary after a traumatic year. Some think the indexes will fall if Tech falls or that inflation picking up faster than the Fed can get to the draw could result in a major policy error resulting in falling equity prices. Other cite taxes or the common refrain Sell In May And Go Away. Some doomsayers suggest that an utter collapse of the US dollar could result in the type of market turmoil investors are always fearful of.

So, if you choose to be nervous then there are a number of reasons you can plausibly cite as potential risks. Our foreign adversaries may also wish to test the Biden admin. But we are seeing spring-loaded markets and are sticking to our forecast of the S&P 500 hitting 4,400 before mid-year.

One of the things that makes us particularly bullish is that Leading Economic Indicators (LEIs) are accelerating and this in my mind supports continued positive price action for equities. The strength of the economic recovery’s momentum is increasing. US LEIs have surged 17% YoY which implied, based on historical data, six month forward returns of 7.7%. with a win ratio of 82%. The VIX is also plunging after a ‘low-energy’ surge. These two facts couple with a near-record amount of institutional cash on the sidelines suggests that the market goes up, not down.

Yesterday, the latest LEI indicators by the Conference Board were posted. They came in at 1.6% MoM and 17% YoY. The monthly change is accelerating which deflates arguments that economic momentum has peaked. This means that as re-opening continues the rate of change is still rising which is bullish for stocks.

The importance of this data is high because strong LEIs are usually a sign of being “early in the cycle” not midway through. Consensus appears to think we midway through. There is no real instance in the chart displayed of a market top nor even a cycle being in late stages when LEIs are accelerating as they are now. In fact there is a significant amount of decay over pretty extensive periods before a top is reached based on the data below. We believe this is very supportive of our assertion that we are much earlier in a bull-market cycle, largely driven by generational factors, than consensus is capable of admitting.

So, we think we should go over our top ideas. Small caps are set for a tactical 10 day rally back to $230. We think you want to be overweight cyclicals given LEI momentum. Our top three sectors are still Energy, Materials and Financials. We’re confident in our bullish call on Energy and think Oilfield Service (OIH) has a lot of upside. Epicenter travel and Entertainment should benefit from re-opening. We are cautious on Technology and NASDAQ and we recommend that you use strength in these names to add to you Epicenter/Reopening exposure.

Figure: Way forward ➜ What changes after COVID-19
Per FSInsight

Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019