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Over the past week or so, a few charts have been making their way across trading desks. These are charts comparing 2022 to the 2000-2003 bear market and the GFC’s 2008 bear market. A few trading-oriented clients noted this and I found these two instances on twitter and reddit.
- the message from these charts is two fold
- first, equities rally even in the midst of a broader downturn –> bear rallies
- second, equities today have far more downside
- is it any surprise many investors expect the S&P 500 to fall towards 3,000 or so
In short, the recovery in stocks since mid-June has been mostly met with contempt. Contempt and skepticism because investors see multiple fundamental problems and as a consequence, equities should not be rallying:
- a recession is only getting started
- EPS downgrades are only getting started
- interest rates are still gonna “rocket higher”
- P/E needs to fall to 15X or lower
- retail investors need to be liquidated
Bascially, skeptics want to see scorched earth and no survivors. This is not our view, of course. While there remains poor visibility and considerable risks, our base case is a “growth scare” and as such, the Fed does not have to push rates as high as markets expect.
Sell-side economists are the most “hawkish” while market-based measures see Fed peaking far sooner
Take a look at this chart put together by tireless Ken and our data science team, using Bloomberg analytics. It looks at the path of Fed funds using multiple measures:
- by multiple measures, Fed is expected to be largely done raising rates in 2023
- the most “hawkish” forecasts are by sell-side economists (see 5% line)
- if the sell-side is the most “hawkish,” shouldn’t we countertrade that?
As many investors know, sell-side consensus is often too early or too late. Thus, if they see the most aggressive path of Fed hikes vs market-based measures, which one do you think is the most likely path? In our opinion, market-based measures are arguably more objective. Read as, Fed not as hawkish as sell-side expects.
INFLATION: July CPI (Wed) and U Mich Inflation (Friday) are key
This week is a big inflation week. There are multiple inflation “soft” and “hard” data points but the two most important are:
- July CPI (Wed) and headline should be weaker due to falling gasoline = good
- U Mich July inflation expectations (Fri) and hopefully this is further cooling = good
CREDIT: Mild “thawing” as high-grade issuance in July is stronger than 4-year average
Credit markets have been frozen as rates soared in 2022, along with heightened recession expectations. But surprisingly, gross issuance in high-grade bonds was solid. According to data by JPMorgan:
- HG issues was up 21% versus 4-year average
- other corporate credit remains frozen
- but this is a sign of a thaw
VIX: Vix managed to fall on Friday, despite a strong labor report
And despite the many calls for a broader sell-off on the heels of a strong July jobs report, the VIX declined to new multi-month lows:
- the VIX is now ~21
- we are near the zone around April
- recall, it was April when S&P 500 fell dramatically from 4,500
- this is a notable divergence from what investors expect
POSITIONING: Investors still “light” and thus, more likely to be dragged into this rally
Our base case remains that stocks rally in 2H, after a treacherous 1H. And the path to a positive 2H is not as narrow as consensus expects:
- leading indicators of inflation are cooling, including gasoline/oil, food and supply chains
- durable goods pricing is weakening
- services prices such as airline/travel are weakening as evidenced by hopper.com
- labor markets seem strong but claims and even wage growth suggest softness
- corporate profit margins are holding up and key to supporting equities
- Fed could be moving slower in 2023 if above plays out
- if 1982 plays out, the entire bear market will be erased in months
- investors are basically in risk-off positions
On the latter point, take a look at HF net positioning on S&P 500. This is at levels similar to March 2020. This is data shared by Macro Hive and compiled from CFTC.
And as we shared last week, data from Deutsche Bank shows CTA (commodity trading advisors) exposures to equities are in the bottom 6th-percentile.
- that is serious risk-off
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.