Asset Heavy Benefits from Demographic Destiny, COVID Trends Remain Positive in US

The global picture for COVID-19 is improving as daily cases are falling across the US, Western Europe and much of Asia. However, India and Pakistan cases are at alarming levels despite being significantly down from their heights. Latin American cases have also been creeping up and are now at 150,000 per day versus 75,00 per day 90 days ago.

In the US, daily deaths are steadily improving and averaging 450 a day which is down from a high of 3,272 in January. So, this is a substantiable improvement. However, 450 deaths per day still means that the annualized rate of COVID-19 deaths are horrifically high at about 164,000 per year. This level is roughly three times all the US combat deaths in Vietnam, so it is substantial. We have deduced with the help of tireless Ken and our data science team that nearly 10% of the deaths are in Florida. There are six states that account for about 40% of daily death: Fl, CA, TX, IL, MI, OH, PA. We have also noticed that daily deaths are rising in six states as well, the only of which is common to the previous list is OH. The other five are WI, IN, MT, TN, and SD. So, deaths are concentrated in a few states and OH is the only states with a lot of deaths moving in the wrong direction.

Cases have been negative compared to a week ago now for 51 days and the progress of vaccine penetration above the level we consider critical in terms of cumulative immunity makes us believe that a resurgence, barring some vaccine resistant mutation, is becoming less and less likely. There are just not enough places for the virus to proliferate once combined levels of immunity reach certain levels.

The latest COVID-19 daily cases came in at only at 16,321, down -4,920 vs 7D ago. As we noted recently, the daily case figure is likely to be distorted due to the Memorial Day holiday. Hence, we expect a clearer view on the case trend next week. That said, we do not expect the holiday gatherings and other related activities to cause a significant resurgence in daily cases similar to in 2020 because of the vaccine progress. The 7D positivity rate, an especially important figure has also declined to 2.0% from 2.3% a week ago.

Vaccination trends have slowed somewhat and there are some alarming reports about a significant portion of the population being hesitant. This could prove problematic in efforts to vanquish COVID, nonetheless, we are seeing incremental improvements due to the introduction of vaccine incentives like lotteries that we discussed last week. A significant portion of states are now at level above 90% combined immunity, that is previously infected in addition to the vaccinated.

STRATEGY: Demographics are Destiny: Millennials Driving “Asset Heavy”

Equities essentially churned this week, with leadership coming from Epicenter and Growth/Technology weaker, which led to a roughly flat market. We still believe equities are moving toward an increasingly “risk-on” sentiment and we see the S&P 500 reaching 4,400 before 2021 is halfway through, meaning in the next month. The gains during this period, in our view, will be led by Epicenter as the economy continues to re-open and pent-up demand converges with long forgone goods and services. We are most bullish on what we call “first-order” Epicenter which is comprised of the Energy, Basic Materials and Financials sectors.

We also like the “CDC easing” groups which are comprised of the more travel-adjacent and gathering specific names like cruise lines, travel, hotels, and theme parks. We still think the likely scenario is for Technology to ‘fall on a slop of hope.’ So, we do advise that you reduce exposure to Tech on strength and use proceeds to increase your exposure to the Epicenter names we think will lead returns as the economy normalizes and benefits from the strongest US consumer in history.

Those who have followed our work for a while are familiar with our extensive demographic studies which we conducted from 2017-2018, explaining how demographic can drive many cycles in the US in everything from cryptocurrencies, equity markets demand for motorcycles, credit consumption and homebuying. Our over-arching conclusion at the time is that demographics are destiny. Millennials are the largest generation in the world, and they are entering their prime earning, spending and borrowing years. Just as the 25-year time-frame from 1975-2000 was very good for asset-heavy companies that particularly benefit from a generation’s peak spending cycle, we believe the ascent of millennials, not to mention inheriting trillions of dollars will lead to a repeat of this phenomenon.

Since 2015, the 5-yr% change in growth in adults 30-48, the age of the prime-spending years, has been positive and, based on our analysis, it is set to peak around 2026. This should echo the outperformance of asset-heavy industries benefitting from generational financial apex just as it did in the last quarter of the 20^th century. Demographics explain stock market peaks. First, it turns out that every single equity market peak since 1900 has coincided with the peak of every single generation. Yup! Could it be a coincidence? I guess it is possible, but millennials do not officially peak until 2038 and they are a huge, well-educated generation with huge earnings potential and massive inheritances coming their way. We think it is a possibility that we’re in bull market for this period in stocks, and those that benefit from the economic ascent of millennials will prosper.

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