Delta Variant Apex Likely Here, COVID-19 Seasonality and signal From Bitcoin Suggest August Could Be “Risk-On”
For the past 45 days, we think the singular factor impacting financial markets, in my opinion, has been the course of the Delta COVID-19 variant. The transmissibility and potential ability to evade existing vaccinations has added considerable uncertainty for investors.
From a sector perspective, the last 45 days have been very challenging. This is where the market “chop” has been most evident:
– Since June 3 (UK delta surge)
– See how Epicenter sectors collapsed (SPHB)
– Energy hit the hardest -15% vs S&P 500 (OIH-0.03% XLE-0.30% )
– FAANG/Technology led (FNGS-1.11% XLK-1.10% )
– FYI, we upgraded FAANG to OW on 6/11/2021 given our view on interest rates
– Epicenter sectors have seen relatively stability/ slight outperformance since July 19th (see below)
…historically, July/August are not months to “be a hero”
Thus, the chop was most evident in this violent sector rotation. In our opinion (mostly our opinion), we have “never made money” in July/August and thus, we view this two-month period as one where investors should not try to be a “hero” — this is in part due to reduced market liquidity:
– many investors take vacation in July/August
– this equates to a “buyers strike” and thus, tape bombs can roil markets
– Since 1900, during the 12 periods when 1H gains >13%, you can see July/August “chop” is the baseline
– “don’t be a hero” means generally avoiding leverage and short-term options
– term premia gets eaten up during “chop”
Tireless Ken and team compiled some data and as you can see, since 1928, August is not generally a great month for stocks. The win-ratio is low at 54% overall.
– when S&P 500 >13% 1H, August return -0.5%
– all years, August return +0.5%
So August base case would argue to be “cautious” — but for reasons discussed below, we think this will not come into play as strongly.
STRATEGY: Delta variant apex + USA COVID-19 seasonality + Bitcoin “signal” argues August could be “risk-on”
So while our base case is July “chop” would possibly stretch into August, we think exigent factors in 2021 actually potentially change this base case.
To be clear, what I am saying is that the “I never make $$$ in July/August” may not apply in August 2021:
– Seasonal analysis suggests USA Delta spike could end in next 10-12 days, or sooner
– Pfizer just released data showing 3rd shot significantly boosts delta antibody response by 5X (vs 2 dose)
– Bitcoin, the global non-US “risk on” proxy is pushing above $40,000 = risk on!
– lastly, many of our clients have been so bludgeoned by the past 45 days, they are outright de-risked
So, for now, we are upgrading our baseline expectations for August. Instead of “chop,” it’s “upside bias”
…Seasonals suggest Delta wave peaks within next 10-12 days
One of our Boston clients, thanks RP (have a great vacation), asked us to look at seasonality for Florida counties. Our data science team looked at the 5 largest counties in FL:
– Miami highest fully Vax rate less seasonality (61% vax)
– Tampa with lowest fully Vax rate far worse seasonality (43% vax)
– but for all counties, notice the seasonality?
– daily cases surging might be due to “air conditioning” season
– should peak this week or next
Florida has been among the worst USA Delta outbreaks. Thus, this is a positive inflection, if the cases turn down next week.
Pfizer data suggest Dose 3 = 100-fold increase in Delta neutralizing antibodies… wow
Pfizer on their earnings call also addressed the efficacy of a potential vaccine booster shot:
– Dose 3 boosts Delta antibodies by 5X vs Dose 2
– versus “non-vax” person, this is 100X
In other words, the case for boosters is very high and is a sound policy strategy, if the USA and other nations pursue this.
– of course, 31% of USA adults are not “vaxxed” at all
– so there remains a tricky policy question how to deal with the “unvaxed”
But this should not change the fact that the Delta risk to the US is strongly diminished. And thus, we are seeing positive tilt on the Delta variant risk.
…Bitcoin pushing above the $30,000-$40,000 range –> Global “risk-on” signal
Finally, Bitcoin is emerging from this 4-month range of $30,000-$40,000. Our base case has been Bitcoin to close >$100,000 in 2021:
– Bitcoin BTC, in our view, is the risk-on asset for EM investors, more than equities
– risk appetite seems to be returning in past week
– a lot of bad news priced in given China crackdown and US tax scrutiny
This is also consistent with our “everything rallies” in 2H2021. A broad risk-on rally.
…Oil (WTI) has also perked up considerably
While anxiety about economic resilience surged in last 45 days, the key commodity to watch, in our view, is WTI and as you can see below, Oil has staged a big recovery. Oil has rallied sharply since late June and is now within a stone’s throw of the 2-year high of $77. We expect oil to exceed $80 in the second half. This will likely be a positive for XLE-0.30% and OIH-0.03% .
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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