Michael Cembalest Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management Jul 26, 2021
Red Med Redemption: Politics, vaccination resistance and the Delta variant; US economic recovery update; big tech reliance on acquisitions to fuel growth; Investor Odds & Ends (NYC hotels, personal/corp/int’l taxes)
While US vaccine resistance is not the sole province of one political party, there are some clear ideological factors at work as illustrated below. Now that the more contagious Delta variant has become dominant in the US, some unvaccinated members of the GOP may reconsider resistance/reluctance to receive medically proven vaccines. Or maybe not: even though 95%-99% of recent hospitalizations involve unvaccinated people, an Associated Press poll found that 80% of unvaccinated Americans “definitely” or “probably” won’t get vaccinated. To round out the week, a conservative talk show host wondered if Florida’s Governor was being bribed or threatened after he encouraged Floridians to be vaccinated.
Scatter plot shows fully vaccinated people as a percentage of Congressional District population vs the political ideological voting score of the Congressional Representative of that area, where -1 equals the most liberal score and 1 equals the most conservative score. While US vaccine resistance is not the sole province of one political party, there are some clear ideological factors at work.
Scatter plot shows fully vaccinated people as a percentage of population vs the percentage of the population who voted for Trump, where each dot represents a US county. The dots illustrate that counties with more Trump voters tend to have lower vaccination rates.
Higher reproductive number estimates for the Delta variant have prompted some to wonder whether the US or other countries will reimpose lockdowns. My sense is that it’s probably too late for that given the prevalence of the Delta variant already. The risk-reward of mRNA and vector vaccines seems pretty clear to me (see charts below), but to each his own. In any case, the bottom chart shows that vaccines are “working”.
Bar chart which shows COVID reproductive number estimates by variant. The original variant had an estimated reproductive number of 0 to about 3, while estimates for the Alpha and Delta variants are about 4-5 and 6-8.5.
Bar chart shows 15 countries with the highest prevalence of the Delta variant. The UK has the highest prevalence at 99%. Other notable countries include Israel at 90% and the US at 81%.
Bar chart shows foregone outcomes, including about 12,000 long haul COVID cases and about 4,000 deaths, per 6 million doses of J&J vaccines administered, compared to the 50-60 cases of Guillain-Barré, a severe neurological disorder.
Bar chart shows foregone outcomes, including about 6,500 long haul COVID cases and about 1,000 deaths, per 4 million doses of mRNA vaccines administered, compared to the 50-60 cases of myocarditis, which is generally treatable.
Scatter plot shows the 7 day average of daily infections per million people vs fully vaccinated people as a percentage of the population, where each dot represents a US county. While some outliers exits, most counties with higher vaccination rates have much lower infections rates.
For detailed CDC reports on foregone COVID cases, hospitalizations, ICU admissions and deaths vs adverse vaccine outcomes, for mRNA vaccines see here:
https://www.cdc.gov/mmwr/volumes/70/wr/mm7027e2.htm#T2_down
and for the J&J vaccine, see here:
https://www.cdc.gov/vaccines/acip/meetings/downloads/slides-2021-07/05-COVID-Rosenblum-508.pdf
Note the low pass-through from infection to hospitalization and mortality in the UK. I’m optimistic about this, but some of my colleagues believe it’s too early to draw conclusions. More importantly, the UK has vaccinated 95%+ of its age 65+ population. In the US, the same figures are 10%-15% lower depending on the state you’re looking at, and even lower in certain counties. In Missouri and Florida, COVID hospitalizations among the vulnerable (almost all unvaccinated people) are almost as high as they were last winter.
Line chart shows daily infections per million, current hospitalizations per million and daily deaths per million for the United Kingdom since February 2020. Chart shows that infections per million have spiked to a most recent value of around 700 infections per million while hospitalizations have remained at around 50 per million and deaths are around 1 per million. In previous infection spikes, deaths and hospitalizations increased relatively in line with infections.
Line chart shows country/region vaccination rates for Canada, United Kingdom, Continental Western Europe, United States and China since January 2021, shown as unique people vaccinated as % of population. At their most recent point, Canada has the highest percentage of people vaccinated at around 70%, closely followed by the United Kingdom. Continental Western Europe’s vaccination rate is just over 60% followed by the United States at 57%. China’s vaccination rate is just above 40%.
Line chart shows daily infection per million in US hotspot states compared to the US ex hotspot states. Hotspot states include Arkansas, Florida, Louisiana, Mississippi, Missouri and Nevada. At their most recent point, the hotspot states have seen a spike to almost 450 infections per million compared to 100 infections per million among the US ex hotspot states.
Line chart shows daily infections per million, current hospitalizations per million and daily deaths per million among the hotspot states (Arkansas, Florida, Louisiana, Mississippi, Missouri and Nevada). Chart shows that daily infections per million have spiked in the hotspot states to around 450 infections per million. Hospitalizations have slightly increased to around 200 hospitalizations per million and deaths have also seen a slight increase to almost 2 deaths per million.
Line chart shows COVID hospitalization in Florida for the vulnerable population compared to the entire population, shown as the hospitalization rate per million people. Hospitalizations for the entire population are around 300 per million compared to almost 500 per million among the vulnerable population, which is higher than the January 2021 peak of around 400 per million.
Line chart shows COVID hospitalizations in Missouri for the vulnerable population compared to the entire population, shown as the hospitalization rate per million people. Hospitalizations for the entire population are around 250 per million compared to almost 450 per million among the vulnerable population, which is in line with the winter peak of around 450 per million.
In the prior note, I wrote that I did not expect lockdowns in the US irrespective of how bad the Delta variant gets. I still expect that to be the case; if most unvaccinated people still refuse to be vaccinated, how could a governor justify locking everyone down to protect them? In any case, here’s an update to US recovery metrics we follow. US manufacturing and services are still firmly in expansion mode, CEOs are very confident and plan to do a lot of hiring, retail inventories are at their lowest levels in 25 years relative to sales, and there’s still a lot of pent-up spending potential relative to actual consumption. The negatives: prices for homes and consumer goods have risen so much that consumers may now slow down their purchases, which when combined with the Delta variant, has prompted a rollover in “COVID recovery” stocks.
Line chart shows regional manufacturing & services business surveys since 2016, where a value of greater than 50 indicates expansion. Most recently, the US is around 65, the highest level on record for the period shown. Eurozone is most recently at around 60, and Asia and Japan are at around 50
Line chart shows US CEO hiring plans and CEO confidence since 2005, shown as an index in which a value of 50 or greater indicates increased expectations. Both CEO hiring plans and confidence are at all time-highs, at values of around 100 and 80 respectively. In 2020, CEO hiring plans reached a low of around 25 and CEO confidence reached around 40. In 2008/2009, CEO hiring plans reached a low of around -10, and CEO confidence reached a low of around 25.
Line chart shows estimated spending potential and actual consumption growth, shown as the year-over-year percent change. Chart shows a spike in spending potential to around 25% from around 5% despite a spike in consumption growth from around -10% to 5%.
Line chart shows card present transactions for social distancing spending shown as the spending change vs 2019. Since its 2020 low of around -70% vs 2019, spending has steadily increased to around 10% vs 2019 at its most recent level. Social distancing spending includes retail, lodging, restaurants, parks, theaters, and other recreational services.
Line chart shows US buying conditions since 2000 for household durables, vehicles, and houses, shown as the net percentage of consumers who think it’s a good time to buy. US buying conditions for all series are close to their all-time lows. The net percentage of consumers who think it’s a good time to buy houses is close to -40%, compared to -7% for vehicles and 0% for household durables.
Line chart shows the COVID recovery vs S&P 500 shown as an index where 100 represents January 2021 levels. Chart shows the COVID domestic recovery is around 107, the COVID international recovery just under 100, and the consumer recovery is around 97.
Reliance of the big 4 tech/social media stocks on acquisitions to fuel growth
We will discuss this in more detail after Labor Day, but given the impact of these stocks on the broad market, an anti-trust revival might curtail these kind of acquisitions. It’s too soon to tell since we have no idea which (if any) proposals from the House Judiciary Committee will be enacted as legislation or implemented as an Executive Order. But this is one of the more important political questions to consider as we head into the fall, since as shown below, the market expects little to no impact of anti-trust regulations on the big 4’s earnings.
Bar chart shows the number of acquisitions to date for Google, Apple, Amazon and Facebook, broken out by acquisitions of companies within their core business vs companies in new sectors. The number of acquisitions in new sectors is more than double the number of acquisitions in these companies’ core businesses.
Line chart shows the contribution of the top 20 firms to the overall US market cap compared to the contribution of the top 5 firms to the overall US market cap from 1990 to 2021. Both lines have been increasing since 2015 and are currently at all-time highs. The top 5 firms (Apple, Microsoft, Amazon, Alphabet and Facebook) show an even more drastic increase.
Line chart which shows the forward earnings per share for Apple, Alphabet, Amazon and Facebook from 2015 to 2023, where a dotted lie represents forward estimates. The market expects little to no impact of anti-trust regulations on the big 4’s earnings, given forward earnings expectations are rising to all time highs.
Investor Odds & Ends: S&P earnings, NYC hotels, and the latest on personal, corporate and int’l taxation
- With a quarter of S&P 500 companies reporting, 88% have beaten consensus EPS expectations and 86% have beaten consensus revenue expectations
- The US CBD office utilization measure we track on our virus portal is at 50% for Texas cities but only 20%-30% elsewhere, among the lowest of all recovery indicators. In NYC, direct+shadow+sublet space has increased by 40 mm sq ft to 80 mm sq ft, compared to 25-35 mm sq ft increases after prior recessions
- A distressed hotel fund just bought the 725-room Lexington Hotel at $255k per key, which is a little more than half of what the seller paid for it in 2011. Permanent closures of nearby hotels (Omni Berkshire Place, Roosevelt) and new rules designed to slow NYC hotel development appear to be part of the fund’s investment thesis. NYC’s hotel industry is still in an “economic depression” according to the American Hotel & Lodging Association, with revenues down 67% vs 2019. Other cities in the AHLA hotel market depression list: Seattle, Boston, Minneapolis, DC, Chicago and San Francisco
- We don’t know how the tax landscape will change since the negotiations over the infrastructure and “human capital” bills are ongoing. But as a placeholder, consider the following: Biden’s original proposal included a 28% corporate rate on domestic income, no deferrals, and a 26.25% GILTI minimum tax after eliminating the exemption for normal returns and eliminating the commingling of foreign tax credits across countries (effectively moving back to a worldwide tax system); new higher taxes on oil & gas; a new SHIELD tax on foreign entities operating in the US; no commingling of foreign tax credits across countries; a cap on like-kind exchanges; full unification of capital gains and ordinary income tax rates for HNW individuals; and forced realization of capital gains at death
- We now believe that the negotiations are headed for a 25% corporate tax rate, a GILTI tax of 15%-19%, partial commingling of foreign tax credits, and possibly a minimum book tax of 15%-20% which we estimate would have a negligible impact on S&P 500 earnings; an increase in capital gains to 28% instead of full unification with ordinary rates; and a possible doubling of the SALT deduction from $10k to $20k. There’s a long way to go, but it is notable how different the possible outcomes are from the original proposal
- There’s a lot of talk about an international agreement on a minimum tax rate. However…how would this actually work? It falls apart considerably if countries do not accept a binding and universally applied definition of income, which means countries would have to agree to unify tax treatment for opportunity zones, R&D credits, drilling expenses, bonus depreciation, LIFO vs FIFO for inventory, bad loan write-offs, orphan drug credits, etc. Otherwise, countries would STILL be able to engage in tax competition with each other and have effective tax rates below the minimum level. This could take years to sort out and implement
In case you missed it: 2021 Eye on the Market archives
Hydraulic Spacking: SPAC review (February)
Future Shock: 2021 Energy paper (May)
An investor’s look at China: new risks and regulations (June)