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Our latest “Fundstrat inflation dashboard” is updated
- indeed.com data shows July jobs openings tanking (slide 15)
- only dentists, pharmacists and doctors seeing rising openings (slide 20)
- FRBNY Global Supply Chain index shows sharp easing to best since early 2021 (slide 25)
- gasoline is down 20% this week, wow (slide 22)
BIG PICTURE: “Buy the dip” regime back in play, as “fundamental capitulation” was June 2022
In our conversations with investors over the past week, many fundamental investors see the current rise in equities since late-June as a counter-trend “dead cat” bounce from an oversold condition. That is, investors concerned about earnings risk (and it is a “risk” in name only currently) believe stocks have downside if the US is in recession.
- Without getting too technical, here is a simple question
- Will investors still think the US is in a recession if 3Q GDP accelerates to a positive figure?
- There are 3 known tailwinds for supporting 3Q GDP to be far stronger than 2Q
- Gasoline is down substantially and that is known to be additive to consumer spending
- 2Q inventory correction is over, which subtracted -2.0pp of GDP
- Supply chain constraints are easing, leading to “met demand”
Think about it. Is there going to be a debate about a recession if GDP growth is positive in 3Q? I am not an economist but the Atlantam Fed GDPnow forecast is tracking to a positive 3Q of +1.4% vs -0.9% in 2Q2022.
The panic in June was a fundamental capitulation, which we believe is more important than a “market bottom”
But a key overlay for any investor at this time is whether the worst is over for equities. That is:
- is this a “dead cat” bounce and stocks resume a decline shortly?
- was June the “low” and a “buy the dip” regime is back?
Our view is the latter, obviously, and we continue to see 2H 2022 as a rally period, taking the S&P 500 back to >4,800. I realize this seems like a tall order, but central to our view is that the US economy is going through a “growth scare” ala 2018.
How this view tracks will get some validation in the next 7 days:
- 8/5 is the July payrolls report and a figure that is “in the middle” would be supportive (not too strong nor too weak, particularly on wages)
- 8/10 July CPI report. As we noted previously, this has been tracking to 0.2% headline, or ~2.5% annualized rate, a huge deceleration of inflation.
In fact, Neel Kashkari, Fed member, even commented today
- “inflation could still be considered transitory”
- and this is not a view held by most market participants
And while we lean in the camp that inflation is far less “sticky” than most believe, we also know inflation is inherently unpredictable.
So why would June have been the fundamental bottom? A comment by Luke below captures this best:
- per Luke, in mid-June, there were many things that were really “bad”
- credit was illiquid
- stocks in a freefall
- inflation breakevens surging higher
- Fed futures pricing in escalating hikes
And there was no part of the financial markets that were unscathed by this inflation panic. Think back to those dark weeks in June. The fundamental despair was evident. And many investors cited the 1980s and argued we needed to buckle down for a long inflation fight.
- that was fundamental capitulation
- investors essentially discarded any positive elements of the US economy today
…if we have seen “fundamental capitulation” then equities have bottomed
If there was capitulation on the fundamental view, this is arguably the biggest weight in a market bottom. Since June, incoming data have been:
- far more sanguine on inflationary pressures, particularly gasoline, and commodities, and food
- interest rates have been stable and far less volatile
- inflation expectations have fallen
- economic data has been holding up, although rate sensitive sectors of economy are weaker
- Fed funds is now essentially at “neutral” and markets don’t see Fed behind the curve
- investor positioning remains extremely risk-off as evidenced by this chart from Deutsche Bank shared by @ISABELNET_SA.
- CTA (commodity trading advisors) are at 6th percentile long equites, which is extremely low
Hence, we think a “buy the dip” regime is back in force for 2H2022. And while a tall order, we see S&P 500 4,800 or higher.
DON’T WAIT FOR FED: Fed raising rates 48% of all periods since 1954
To sum it up, a lot of investors tell us they won’t be confident owning equities until the Fed is done with its last hike. There is obviously a lot of logic to this view:
- particularly in 2022, since we don’t know how far the Fed needs to raise rates
- but we know Fed fund futures markets see Fed done as soon as January
- but it is “path dependent”
But as the chart below highlights, the Fed has been raising rates for roughly 48% of all periods since 1954:
- red lines are when Fed is raising rates
There is a generalized view that stocks are “risk off” when the Fed is raising rates, but we think this overly simplifies market behavior, especially in the 2022 context:
- since 1954, equity returns are slightly worse when Fed is raising
- when raising: 6M returns +4% and 65% win-ratio
- when cutting: 6M returns +6.1% and 72% win-ratio
- but the bigger difference today is Fed “shocking” mode
- Fed was trying to “shock” markets to reduce demand
- this put pressure on equities as inflationary pressures surged
- but since June, these pressures are easing
PEAK FED FUNDS: Markets see peak in rates in January 2023
Looking at market expectations on Fed funds, markets see peak in Fed rates in January 2023:
- peak Fed funds of 3.28% (mid-point), implying upperbound 3.5%
- This is 100bp or 4 additional hikes
- 6 months to the peak in rates
- Fed officials express surprise at this, as “hard data” shows quite a lot of inflation
- but markets sniffed out higher inflation in 2021, well ahead of Fed
- so markets might be sniffing out lower inflation well ahead of Fed
PEAK FED: Since 1980, if this is a “growth scare” then equities indeed bottomed in June 2022
Take a look at equity market behavior in front of a peak in rates:
- if we are 6M from a peak
- this was seen 6 times since 1980 as listed below
- 3 of 6 times, equities bottomed almost exactly 6M before last hike
- November 1988, December 1994 and December 2018
- These were all “growth scares”
- If the US entered a recession, then further downside is possible
We don’t believe the US entered a recession. But this is a central market debate.
BOTTOM LINE: Consensus still looking for a recession and S&P 500 3,100 or lower but US tracking for a “growth scare”
Ultimately, the key divergence between our sanguine view and consensus is whether the US is tracking towards a recession (consensus) or a growth scare. In our view, recent incoming data and even 2Q2022 EPS season support a “growth scare” scenario.
- If this is a growth scare
- markets can respond positively to weaker inflation
- we expect lower inflation readings for July through December 2022
- this would give Fed greater optionality
- as Fed is at “neutral” rate today at 2.5%
- hence, equity risk premia can fall
- in 1982, the entire 36 month bear market was reversed in 4 months
33 GRANNY SHOTS: Updated list is below
The revised 33 Granny shots is shown below. The list on the table below is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear on at least two portfolios:
- $AAPL in 5 of 6 portfolios
- $GOOGL $MSFT in 4 of 6 portfolios
- $AMZN $META in at least 2
- This reinforces our favorable view of FANG in 2H2022
33 Granny Shot Ideas:
Consumer Discretionary: $AMZN, $AZO, $GPC, $GRMN, $TSLA
Information Technology: $AAPL, $AMD, $AVGO, $CSCO, $KLAC, $MSFT, $NVDA, $PYPL, $QCOM
Communication Services: $GOOGL, $META
Energy: $CVX, $DVN, $XOM
Financials: $ALL, $AXP
Real Estate: $AMT, $CCI, $EXR
Health Care: $ABT, $BIIB, $ISRG, $MRNA, $REGN
Consumer Staples: $BF/B, $MNST, $PG, $PM
33 Granny Shot Ideas: $AAPL, $GOOGL, $MSFT, $ALL, $BF/B, $CSCO, $NVDA, $PG, $PM, $ABT, $AMD, $AMT, $AMZN, $AVGO, $AXP, $AZO, $BIIB, $CCI, $CVX, $DVN, $EXR, $GPC, $GRMN, $ISRG, $KLAC, $META, $MNST, $MRNA, $PYPL, $QCOM, $REGN, $TSLA, $XOM,
POINT 1: Total COVID-19 cases 782,067 over past 7D (avg 111,724 per day), down -66,484 (-9,498 per day) vs same period 7D ago…
Current Trends — COVID-19 cases (past 7D vs. 7D prior):
– Total new cases 782,067 vs 848,551 7D prior, down -66,484
– Avg daily cases 111,724 vs 121,222 7D prior, down -9,498
– Hospitalized patients 39410, down -0.6% vs 7D ago
– 7D Avg daily deaths 444, up +5.4% vs 7D ago
Over the past week, a total of 782,067 (avg 111,724 per day) new cases were reported in the US, down -66,484 (avg -9,498 per day) compared to the same period 7 days prior. Besides the new cases, the ever slowly-rising hospitalization counts also appear to roll over. Fatalities remain flat. These points suggest that the pandemic is likely (or “more aggressively” has already been) over. Although many people are still affected by long COVID and there remain over 100k new cases per day, because of the reduced virulence, the impact from COVID to an average American has largely faded.
The 7D delta in daily cases, which has been negative in 12 of the last 13 days, shows that daily cases are falling. Also, 7D delta in daily cases has been declining continuously. Translating that to daily cases, it means cases are starting to accelerate to the downside.
Current hospitalization rate has been gradually rising since mid-April, but is finally showing signs of peaking, and seems about ready to roll over. If current hospitalization really starts to decline in the next few weeks, it would confirm that the peak of the BA.4/5 wave is behind us. Daily mortality has been largely flat during the entire mini wave recently. Although there tends to be a 2-3 week lag between the case/hospitalization trends and the death trend, it is very unlikely that daily deaths start to pick up and rise significantly.
Below we show the weekly new COVID cases by state. As you can see, more than 2/3 of states have reported lower case figures vs 7D ago (blue = cases are down). Ohio and Pennsylvania are the only two states where cases have risen significantly over the past week, while states such as CA, NY, FL are seeing the case declines persist.
POINT 2: VACCINE: CDC Updates Switch From Daily to Weekly
Current Trends — Vaccinations:
– avg 70k this past week vs 0.2 million last week
– overall, 33.2% received booster doses, 67.0% fully vaccinated, 78.5% 1-dose+ received
Last week, the White House announced its agreement to purchase 66 million doses of Moderna’s bivalent vaccine booster for use in the fall and winter. This is in addition to the 105 million vaccine booster doses the US government purchased from Pfizer for potential use come fall. Should the vaccine boosters, which target newer subvariants, be cleared and recommended by the FDA and CDC, 171 million booster doses will be available to Americans as soon as September. Currently, immunocompromised Americans over age 12, as well as Americans over age 50, are the only groups eligible for a second booster (fourth dose of Moderna or Pfizer). Officials have agreed that the most promising course of action is offering the reformulated booster doses in the fall, to combat a possible winter surge. While some health officials are arguing for second boosters being made available before the reformulated versions are ready, the FDA and CDC seem to be in favor of focusing efforts on the autumn rollout, especially given the tendency of cases to rise in colder months, and after Pfizer and Moderna officials assured the FDA that they could speed up the rollout process in time for September. This is in contrast to earlier this summer, when Dr. Stephen Hoge, president of Moderna, estimated the updated Moderna vaccine would not be ready for distribution until late October or early November.It will be interesting to see if the bivalent boosters have a successful rollout Last summer, it took weeks of deliberation for the FDA and CDC to authorize initial booster doses for American adults. Furthermore, it is notable that only 171 million doses are being purchased, which is not enough for all eligible Americans. So far, under 40% of Americans eligible for boosters have received them, indicating low uptake.
Vaccination frontier update –> all states now above 100% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent.
Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC).
– Currently, all states are above 100% combined penetration
– Again, this metric can be over 100%, as infected people could also be vaccinated, but 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated
The CDC has recently started reported vaccination statistics weekly, rather than daily, which is why the most recent data point shows 0.5 million doses given. Those 0.5 million doses were given over the last 7 days.
This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.
In total, 604 million vaccine doses have been administered across the country. Specifically, 260 million Americans (76% of US population) have received at least 1 dose of the vaccine. 222 million Americans (66% of US population) are fully vaccinated. And 110 million Americans (31% of US population) received their booster shot.
POINT 3: Tracking the seasonality of COVID-19
***We’ve updated the seasonality tracker to show figures from the last 9 months, from this calendar day, in each of the last two years***
As evident by trends in 2020 and 2021, seasonality appears to play an important role in the daily cases, hospitalization, and deaths trends. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus. The possible explanations for the seasonality we observed are:- Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer- “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors- Opposite effects hold true in the winter
During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, southern states are not showing as much of a spike as other states. This could be attributed to spring weather in the south encouraging more outdoor activities.