The Delta variant is essentially correctly viewed as “pandemic of the unvaccinated”
For the most part, we continue to view the COVID-19 Delta variant as more “bark than bite” in USA. Meaning, while there may be short-term hysteria about the surge in USA cases due to Delta variant, we do not think policymakers will “close” the US economy.
– in other words, we think the 2H2021 economic resurgence remains on track
President Biden, Wednesday night at a town hall, called the current resurgence a ‘pandemic’ of the unvaccinated. We believe this is essentially correct. Sure, there are breakthrough cases, and breakthrough cases could surge in the USA. But we do think the severity of healthcare risks are mostly resting on the “unvaccinated” Americans.
…but the Delta variant is causing a surge in USA hospitalizations, contrasting with UK and Israel
The UK and Israel are similarly seeing a resurgence in cases, and the USA surge is far weaker, so far, than either UK or Israel (see below section on parabolic analysis). But this is not the key difference:
– UK, hospitalizations barely budging –> Delta “bark no bite”
– Israel, hospitalizations barely budging –> Delta “bark no bite”
– USA, hospitalizations eh… might be rising –> Delta “more bite, but still little bite”
OK. So Delta is sort of looking like no big deal in UK and Israel. And hence, the UK is still moving full force with its reopening. But the US upturn in cases is somewhat worse.
. ..USA incremental hospitalization rates 2.3% > Wave 3 peak of 1.5% and 10X UK
The US incremental
hospitalization rate is troubling:
– UK incremental hospitalization rate –> 0.2%
– Israel incremental hospitalization rate –> 0.9%
– USA incremental hospitalization rate –> 2.3%
– 10X UK
– exceeds USA Wave 3 of 1.5%
So, Delta is creating a higher level of hospitalization in the US, compared to what Delta is doing in UK and Israel. This is somewhat alarming. At least in my opinion.
…69% of USA adults 1-dose or more of COVID-19 vaccination = 31% unvaccinated
The percentage of Americans age >18-plus with 1 dose of a COVID-19 vaccine is actually 69%. This is a surprisingly high percentage:
– meaning about 31% of Americans age 18+ have no vaccination
– this is about 55 million American with no vaccination
In other words, there is still a staggering 73 million Americans with no vaccination from COVID-19.
– many will have already been infected with a prior infection
– per IHME estimates, about 25% of Americans were infected
– still, this means about 55 million Americans have had no infection and no vaccination
So, this is the most vulnerable pool of Americans. And it is a surprisingly high figure.
75 million Americans with no vaccination, >50%, or >40 million have co-morbidity = higher hospitalization risk
The reason we think hospitalization rates in USA are higher, is that >50% of these unvaccinated adults has a co-morbidity, meaning a higher risk of getting hospitalized:
– 25% high blood pressure
– 23% obese
– 11% smokers
– 7% diabetic
– 6% asthma
– 5% immune compromised
– 5% COPD or other
You get the picture. These are exactly the people at risk of getting a severe/riskier case of COVID-19. Sure, there is overlapping conditions (ie, diabetic + obese, etc.).
– but >50% of unvaccinated have a co-morbidity
Therefore, is it any wonder that USA hospitalization rates could be surging vs UK and Israel? Those nations have a lower prevalence of co-morbidity. That is the big difference.
For now, this does not change our view the USA Delta variant is more “bark than bite” — but it does support the notion that this pandemic is a “pandemic of the unvaccinated”
STRATEGY: July Chop still baseline, but focus should be on 2H2021
We are almost done with the month of July and as the 30-minute price chart below shows, July is indeed a month of chop. This has been our base case:
Our original S&P 500 base case:
– rally to 4,400
– potential decline to 4,100
– exit month 4,300
As shown below, the month has seemingly played out this way:
– rally to 4,394
– fall to 4,233
– exit month?? –> possible 4,300-ish
As we wrote about several times, we expected July to be simply a tough month for several reasons:
– Delta variant, we believe, could surge to 100,000 USA cases = headline risk
– after strong 1H rally >13%, July historically chop with drawdowns 3%-5%
– because of “revenge travel,” we expect many institutional investors to be “on the beach” = buyers strike
So, this means existing market momentum/trends are disrupted. This is what we are seeing. Many stocks/sectors have been shot out of the sky and others have fallen so much, it feels like an obliteration.
However, we do not believe July is a change in trend. It is just a reminder to me that one never makes money in markets in July and August (yup).
Good news = VIX low energy surges = downtrend intact
We are not more bearish because the VIX continues to send a positive signal. As you can see, the VIX made a low Energy surge in July. And this failed at our “arbitrary trendline” and has since sunk again:
– VIX falling = risk-on
SECTOR STRATEGY: Still see Epicenter lead in 2H2021, even as “buyers
strike” today
We continue to see 2021 being led by Epicenter stocks. That is, groups hardest hit by the pandemic and we see reasons to like Epicenter. The strongest argument, in our view, is Epicenter groups have the greatest capacity to positively surprise:
– operating leverage from cost cutting
– demand surprise from revenge spending
That is the simplest explanation.
July is a month of a buyers strike. And therefore, groups that are seen with cyclical risk are going to get hit the hardest. Hence, there has been a lot of selling pressure in the cyclical epicenter groups. But as we stated above, this is not what we see for 2H2021. But it is not surprising.
…resilience in oil speaks to the momentum of the economic reopening
We know investors are questioning the economic reopening given the Delta variant. This explains the collapse in bond yields, etc. But we
believe Delta will not change the course of the global re-opening ultimately. And if one is doubtful, one can look at the resilience in oil.
– oil had a sharp fall in the month
– bounced sharply
– still in an uptrend
– at $72, looks on track to hit $80-plus this year
Similarly, look at Oilfield Services, OIH ETF, looks ready to surge after bouncing off 200D
OIH similarly fell sharply in July. But:
– the uptrend remains intact
– bounced off 200D moving average
– daily RSI got fiercely oversold
– similar to March 2020 and Sept 2020
Did you see the monster rallies that followed?
I don’t see why this is any different. We see OIH rallying strongly in 2H2021.
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
