Pfizer essentially confirming Omicron is mild = Omicron needs to be “repriced” in financial markets
Pfizer’s CEO, Albert Bourla, told the WSJ yesterday that Omicron does appear milder and this is another positive anecdote.
- Symptoms from Omicron appearing milder
- This is consistent with many health experts who have argued virus gain transmissibility but trade-off tends to be lethality
- This is still not clinically proven, so this remains another “incoming anecdote”
But equity markets and consumers (based on google trends) perceive far more severe risk from Omicron. Thus, to the extent that Omicron proves to be milder, the more likely it is we see markets levitate.
- we published this exhibit on Sunday
- and the point is that we think there is a 95% chance Omicron is “less bad” than markets believe
- incremental data supporting “less bad” would lead to equity markets gaining
…Daily deaths in South Africa are not increasing = good sign
COVID-19 remains unpredictable, so take our comments with a grain of salt. Our data science team, led by tireless Ken, has highlighted daily death data (deaths per 1mm) in South Africa and the 9 provinces.
- daily deaths have plunged since mid-2021
- the emergence of Omicron has not changed this trend
- this is another incoming anecdote suggesting Omicron is less lethal
Cases have risen in South Africa, and this reflects a surge in cases from Omicron. But the surge in cases stands in contrast to the mild trend in daily deaths.
BEST HEADLINE: Denmark finds Omicron in sewage and gives up trying to contain it
This is one of the best headlines ever.
- Like when in history has policy ever been decided because of what was found in sewage?
- That is making decisions from the gut(ter)
But apparently, Denmark has now given up its attempts to contain Omicron, since it was found in the sewage.
USA COVID-19 is still not “just the flu” (yet) as hospitalizations are still rising
USA cases will likely surge in the next few weeks. It is a function of:
- seasonal surge in colder states
- particularly impact those “unvaxxed”
- Omicron proliferation
Government overreach –> NYC lame-duck Mayor De Blasio mandates private firm vaccine mandate = disaster
Omicron panic has resulted in the lame-duck Mayor of NYC, Bill De Blasio, to declare a new executive order:
- all private businesses will be subject to a vaccine mandate
- this has proven to be a disaster for Federal contractors
- why would this prove to be effective in NYC?
While I am not a policymaker, the simple question in my mind is this:
- if it did not work at the federal level, why would it work at the city level?
STRATEGY: S&P 500 two-day rally places index within 1% of all-time highs… YE rally to 4,800 intact
Stocks became frightened by its own shadow post-Thanksgiving, given the dual whammies of Omicron and the hawkish Fed pivot. And for the variety of reasons outlined in our Sunday report, we believed stocks still had the capability to rally. And the two-day rally places the S&P 500 now within 1% of its all-time high
Why did stocks fall 5% in the past two weeks? In a way, much of this could be PTSD, as markets are nervous about the risk of policy over-reaction from COVID-19. And the initial actions taken by governments to close borders is an over-reaction. Additionally, stocks were technically extended.
That said, it sure seems like markets got over its fright.
LESS BAD: Plan coming together for Washington to fix debt ceiling
Another incremental positive is that Congress seems to have resolved the debt ceiling issue. As pointed out by Tom Block, head of policy strategy for FSInsight, this was passed by employing some Senate rules.
Thus, given the multiple less bads, we see equities rallying into YE. Progress is not a straight line, so some consolidation is possible, but as the chart below shows, a move towards 4,800 is not necessarily “heroic” any longer.
What is less bad? (=good)
- Omicron lethality
- Fed pivot now priced into bond markets
- Washington fixes debt ceiling
- Institutional Investor cash balances highest ever
- AAII sentiment shows highest net bearishness in 2021
See the picture? Things are less bad, but this is good.
SECTORS: Leadership still Cyclicals/Early-cycle aka Epicenter
Relative sector performance is shown below and as we can see, 5 sectors are showing positive relative trend:
- Energy
- Basic Materials
- Technology
- Transports
- Discretionary
- sort of Financials/Banks
These are all cyclical groups. And also have general positive exposure to reflationary trends. Inflation, incidentally, in isolation is not a bad word. The real risk to markets is:
- too much inflation hurting consumer confidence
- or unanchored inflation expectations, fear of uncontained inflation
This is not necessarily what markets seem to be pricing. If markets were worried about either of the above, Defensive stocks or Growth stocks would be leading. Instead, we are seeing Cyclicals lead.
Into YE, our recommended strategies are:
- Energy
- Homebuilders (Golden 6 months) XHB -2.01%
- Small-caps IWM 0.87%
- Epicenter XLI 0.52% XLF 0.17% XLB -0.57% RCD
- Crypto equities BITO -0.44% GBTC -0.56% BITW
Into 2022…
- Industrials
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
