The Covid Playbook

It is simple … sell the old economy (cyclical), value and anything considered risky (small cap). buy large cap, dependable growth (tech), i.e. the bulletproof, the innovators. Valuation doesn’t matter, you just need to be somewhere with immunity to the economic ravages of the renewed pandemic.

We just saw this occur over the last month

It came about due to the new lockdowns in Europe and the emergence of more contagious strains of the virus. It continues, reinforced by the huge new wave of Covid 19 in India. A general market-wide correction of the tremendous run that began in November took hold in February …  with the Nasdaq and S&P 500 both peaking February 15.

The Media has done its best to accentuate the negative

“‘A devastating blow’ — doctor says pausing J&J Covid vaccine will have far-reaching effects” (cnbc- 4/13/21)

The Russell 2K peaked a month later at about 2350 (a new all-time high) then fell over 10% the next nine days. As news of the lockdowns and new variants subsided the R2K attempted to rally, but that rally failed with news of the pulling of the Johnson and Johnson vaccine off the market (this looks to be very temporary). Meanwhile both the S& P 500 and Dow posted  new all-time highs last week with the Nasdaq knocking on the door of new highs … a flight to the safety of large cap growth.

Corrections are normal

This one is no exception. It was certainly needed. What I take exception to is the return to the Covid play book when the facts on the ground would argue that we move on.

• The vaccines work. U.S. daily cases peaked January 7th, 2021 at 275,678. Today April 19, 2021, U.S. cases were, according to worldometers.info, 50,359 (18% of peak). Half of all US adults have had at least one dose of vaccine. 10% of the population have been diagnosed with the virus. If these diagnosed case numbers are correct, 4 or 5 times the diagnosed number may have had the asymptomatic versions of the disease. This leads me to believe the virus should be in the rear view mirror soon. It was in the market’s rear view mirror a year ago.

• The new waves around the world were predictable, knowable and should be short-lived. Meanwhile, vaccine doses go begging in the United States signaling a greater availability of our vaccine for export. This should go a long way to solve the situation in Europe and other parts of the world. 

• Finally, lest we forget, there is the massive stimulus that has been pumped into the economy, almost $5 trillion (20% of GDP) in the past 12 months. Because of fear regarding economic impact of the virus, people held on to their money. With the economy on the mend and the greater confidence this will create these savings are available to satisfy pent up demand. Sprinkle on low or zero interest rates and we may have the ingredients for boom times.

• But wait. There’s more … A major US infrastructure bill is in the works

Fear continues as the overriding emotion

Against this backdrop one has to ask why is the 10-Year US Treasury note trading at a 1.6% yield? Don’t blame it on the Fed and quantitative easing. As a source of demand for treasury securities the Fed is a drop in the bucket. With purchases scheduled at $125 billion per month ($6 billion per trading day) the Fed’s buy orders pale in comparison to the nearly half a trillion daily trading volume in the government securities market. If they took it away tomorrow no one would notice (unless you advertised it then they would scream bloody murder).

No, the 1.6% 10-yr UST represents to investors a very competitive yield alternative to investors around the world. For example the yield on the German 10-Year is a negative 25 basis points. Both are absolute safe havens for principal (except from inflation). Which one would you pick?

These returns represent a large body of investors so fearful of principle loss that they are will to take a pre-tax return below the desired 2% inflation rate to guarantee the safety of their principal. Based on what appears to be major positive fundamentals, which should be inflationary, there is no other reason that treasury note should be trading at such a low yield. I don’t get it..

Forget valuation … We have to own something

Many investors, after having had their heads handed to them during the Covid crash, cannot be out of the market. FOMO (Fear Of Missing Out) takes hold and money flows back into “Big Tech” while small cap and value stocks struggle to regain footing. As usual, many are looking in the rear view mirror and are returning to last year’s playbook. All I can say is caveat emptor. When the fear comes out of the ten-year, rates will increase (as a good sign for the recovering economy). This event will not be so kind on those stocks with lofty multiples, the old leadership.

My take … may be time to change playbooks 

What’s yours?