Michael Cembalest Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management Dec 7, 2021
On equity markets, the Lombards, SPAC investors, Bone-setters, George Washington, COVID bots and Omicron
We started out 2021 optimistic on equities given our outlook on economic growth, earnings growth, limited new equity supply, low interest rates and the arrival of mRNA vaccines. We underestimated just how much the reopening would boost earnings, which exceeded our expectations across the developed world. Earnings growth accounts for all of the developed world equity market gains in 2021 as P/E multiples fell markedly. By the way, that US-EM equity barbell vs Europe-Japan worked again this year; resistance to the barbell is futile. The selloff in China shows few signs of relenting as more Chinese companies prepare to delist, and as China has now expanded the regulatory powers and reach of antitrust regulators.
Along the way in 2021, we made some pit stops in this piece1. A few related exhibits appear below.
- January: the 12th Amendment and the Electoral Count Act in the context of the Joint Session of Congress
- February: a thorough trashing of the SPAC market for institutional and retail investors
- March: an update of our concentrated stock research, a project first launched in 2004
- May: our 11th annual energy paper which focused on the four main challenges to decarbonization
- June: our 4th deep dive analysis of private equity and venture capital returns
- September: an analysis of goods and labor supply chain delays and how long they would take to resolve
- October: update on the US states with the most underfunded pension and retiree healthcare plans
- November: the commodity price shock and the imbalance between supply and demand policies
This month, I’m working on the 2022 Eye on the Market Outlook which comes out Jan 1. In addition to the global market section, we will cover:
- the landscape for dividends and yield-oriented investors
- China’s investment prospects after the regulatory purge
- US office market fundamentals which are already improving despite COVID and low office utilization rates
- potential upside for timber investors in a world searching for real sequestration benefits
- Brexit and the high price of national sovereignty
- the latest evidence on ESG investing and portfolio impacts
- infrastructure investing in regulated electricity distribution, solar power generation and liquid bulk storage
- some underwhelming news on fintech lending behavior during COVID
- cybersecurity investing, where the presence of malignant forces increases potential returns for investors
More on the Middle Ages. I’m writing the 2022 Outlook from a basement apartment where I have been for the last 6 weeks, recovering from an accident which resulted in the x-ray below of my reconstructed leg. I was engaging in activity typically associated with younger people. The outcome was not unusual; middle-aged people have similar lifestyles and injury patterns to younger people but have higher/longer hospital charges, injury complications and ICU stays that are more similar to the elderly2.
While this has been a regrettable incident, I’m fortunate to have access to 21st century medicine. In the Middle Ages, surgical techniques were different. Bone-setters would use devices to realign fractured limbs, which were then covered with bandages dipped in egg whites, milk or mulled wine, and then inserted into large wooden splints made of tree branches. Subsequent growth deformities would sometimes occur and in case of infection, limbs might have to be amputated. Pain medication: ice (when available), alcohol (usually gin) and laudanum (opium). Ether was not widely used until the 1800’s.
Fast forward to 2021 and the COVID pandemic. Dr. Atul Nakhasi, physician and policy advisor to the Los Angeles Health Department, wrote a post on LinkedIn in October. He talked about caring for unvaccinated COVID patients in their 20’s and 30’s who were on ventilators, and how they regretted not getting the vaccine. I used to think LinkedIn was less prone to this, but Dr Nakhasi’s post attracted a flurry of critical responses. The barrage included comments about creeping socialism, how CDC treatment protocols are killing people, how drug companies prefer more sick people since they make more money that way, how doctors are being “held at gunpoint” and arrested if they say anything negative about the vaccine, that vaccines are more dangerous than the disease itself, that vaccines don’t work, that they cause fertility problems, that more people die of the flu than from COVID, that most deaths are vaccinated people and that deaths are being miscategorized since doctors have a financial incentive to inflate COVID deaths since they make more money that way.
Maybe some of these responses were from bot accounts designed to sow dissension in the West; according to a 2021 report from the EU External Action Service, that’s exactly what state-sponsored operatives have been doing via social media3. Furthermore, a May 2021 piece in the Journal of Medical Internet Research found that two thirds of all bots were discussing COVID in some way4.
I understand those who started out skeptical in the Greek sense of the word (“skepsis” = investigation), since COVID is the first disease for which mRNA vaccines are being widely used. But for the record…
[A] Overall death rates in the US have been much higher than normal, and COVID is the only rational explanation for that. You can ignore people who ramble on about miscategorized death certificates.
[B] Estimates for COVID’s infection fatality rate (the chances of dying if you get it) vary but no matter which one you use, they’re all much higher than the infection fatality rate for the flu. The range: 18x-84x higher.
[C] How many unvaccinated people are actually dying of COVID vs those dying from the flu? We can estimate this for the 20 states reporting such data. In these states, unvaccinated COVID deaths per day have been ~18x higher than the number of unvaccinated flu deaths per day, and the year isn’t over yet. The details: just for the period from April 4 to October 2, around 7 people per mm unvaccinated against COVID died every day in these states, compared to 0.4 daily deaths per mm people that were unvaccinated for the flu. For the flu, we are using the three years before COVID as a baseline.
[D] While there are signs of fading mRNA efficacy vs infection, efficacy remains high vs hospitalization, ICU admission and death, particularly with a booster. You’re taking much greater chances by being unvaccinated, and that’s before incorporating risks of long COVID conditions. The chart below is through October and does not include the November COVID wave. New risks for the unvaccinated: based on data from South Africa, Omicron looks to be much more contagious than the Delta variant, and has resulted in greater reinfection rates among unvaccinated COVID survivors. There are preliminary signs of less disease severity, particularly among vaccinated people but the data is still very recent. See our COVID web portal for more on the Omicron variant.
[E] mRNA vaccines prevent negative COVID outcomes far more often than they cause myocarditis. See COVID portal Section 1 for information on the massive number of infections, hospitalizations, ICU admissions and deaths prevented by mRNA vaccines compared to cases of myocarditis that they cause.
If you are going to ignore all of this, you might as well transport yourself back to the Middle Ages and take your chances there with a cocktail of leeches, hydroxychloroquine and zinc. To all of our clients, vaccinated or not, I wish you all a safe and happy holiday season.
2 “Injury patterns and outcomes in late middle age”, Stephen Gale et al, East Texas Medical Center, March 2018
3 “EEAS Special Report Update: Short Assessment of Narratives and Disinformation around the COVID-19 Pandemic”, European Union External Action Service April 28, 2021
4 “Bots and Misinformation Spread on Social Media: Implications for COVID-19”, Journal for Medical Internet Research, Brenda Curtis (National Institute on Drug Abuse/NIH) et al, May 2021