Course Correcting: Financials UW to N, FAANG from UW to OW
– COVID-19 case, hospitalization, death, and positivity rate trend remains positive
– The strength of markets in the face of hot inflation market sends us a key signal about what will fuel rally to 4,400 by mid-2021 higher
– We believe the market’s reaction to inflation numbers will benefit tech and undermine financials
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The latest COVID-19 cases came in at 12,387 which was down -3,934 from a week ago. Considering the additional 1,500 cases that FL is likely to report (we switched to use CDC for FL which is subject to a lag), the 7D delta in daily cases could reduce to approximately -2500 compared to the current level. The decline in daily cases has been slowed over the past few days but we have not seen the case begin to surge following the Memorial Day holiday. The data distortion resulted from the holiday will still last a few more days and then we could have a clear view on the trend next week.
There was a spike Monday in the 7D delta of cases, but it has again turned negative after that isolated event. Although the decline in daily cases seem to slow down, the daily cases remain on a downtrend and we haven’t seen the case figure surge yet. As we noted previously, the data distortion could cause the 7D delta to fluctuate in the next few days, but we still expect the steady decline in daily cases to persist after the data distortion fades out.
Current hospitalization, daily deaths and positivity rate are at all-time lows and look like they will continue to fall given vaccine penetration. As we pointed out and it looks as if it has come to fruition, the United States was likely to follow a path similar to Israel as vaccinations ramped up. That does indeed appear to be happening. All three metrics of hospitalizations, deaths and positivity rates are all-time lows since the start of the pandemic.
All states have reached the combined penetration rate (vaccines + infections) of 70% that we believe should start resulting in a high enough level of immunity to deter further significant outbreaks. Several states have a combined level of 90% and other states are lagging behind significantly. Gradually, the US is getting to that threshold of presumable herd immunity. So long as a vaccine resistant variant doesn’t spread widely, the continued retreat of cases should continue.
STRATEGY: S&P 500 achieves new all-time high and closing. S&P 500 4,400 by mid-2021 intact
The S& 500 managed to breakout to a new all-time high on Friday. It also did the previous day. The core CPI came in strong at .7%, which is significantly above the .5% consensus estimate. Instead of seeing risk assets fall, we saw risk assets rally and the market made two consecutive ATH closes. As you know, we try to listen to markets and if more is revealed that changes our mind, we course correct to give you maximum advantage.
The US 10-yr fell, which is counterintuitive to the CPI number and also the Nasdaq led the gains, which is the opposite of what you would expect. The market is telling us something important here.
By the way, the breakout to new highs was presaged by the upside breakout in the advance/decline last week (see our prior notes). The strong rise in the adv/dec line, in our view, is a sign of the equity market getting stronger, and in turn, presaged this upside breakout. So, our base case of a surge in the S&P 500 to 4,400 before mid-year remains intact. We now believe we’ll get there via FAANG and Energy and that Financials will be a market-perform.
I realize this is a somewhat abrupt change in our view on FAANG, since we downgraded the group in early May. However, we don’t want to be stubborn. Nor are we ever saying that the future is not uncertain. It is.
But, we see higher probabilities that more of the 200 points for the S&P 500 rally to 4,400 are likely to come from Tech/FAANG than Financials. And as such, we think this shift if warranted.
This is partially because Technology outperforms Financials when interest rates start to roll over. So, if they are starting to rollover this is generally a tactical sign to sell Financials vs. Tech/FAANG.
The bottom line is that we are calling for a course correction. We now think FAANG will be key to the S&P 500 reaching our mid-year price target on the S&P 500 of 4,400. We are more saying FAANG will be key to these gains than Financials. which some indicators, like those we use from Tom DeMark’s work, suggest is overbought. We are course correcting to recognize that FAANG is now likely more of a component of upside than Financials. But we are still more constructive on Energy versus FAANG. So, Energy is still our top sector idea.
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
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