The last few months have been some of the best EVER to be long stocks. Many of the names that we have added to the Investing Whisperer portfolio as recently as February or March have become multi-baggers since than time.
The moves have been unbelievable. Yes, many of them occurred off a depressed bottom, but still – our names have often gone up multiples from where they were before the virus hit. Just this week I took gains off the table of 217%, 244%, 581% and a rather ridiculous 3,173%.
My colleague called it the Pandemic rally, which is exactly right. It has been counterintuitive, but the fact is that increasing COVID cases—especially in the USA—have been a big positive for all financial assets.
While that may seem crazy on the surface, it really is not. COVID cases go up and Peleton (PTON-NASD) goes up. Overstock (OSTK-NASD) goes up. Gold stocks (insert any symbol!!) go up. Hotels and airlines go down.
Bank of America research produced the following charts this week that highlight the stark outperformance of tech.
Source: Bank of America Investment Strategy
An incredibly high portion of the gains have occurred in a very narrow sector. In Chart 13 (above) we see just how narrow this rally has been – take out the 5-biggest tech names and the rest of the market has not yet recovered to its January levels.
These moves are not entirely irrational. The market understands what is happening. In the aggregate, it has decided that COVID is good for stocks. But it recognizes that while it is exceptionally good for a few stocks, it is not good for all stocks.
Source: Unit Economics
It is good for stocks because monetary and fiscal stimulus are good for stocks, and more COVID means more stimulus. While the economic fundamentals deteriorated – and yes, they are still deteriorating – stimulus more than makes up for it.
Consumer income and savings are significantly higher during the months impacted by COVID than they were before it. The amount of stimulus in the United States will more than offset the economic toll of the virus.
In the aggregate, things are actually better, not worse—for now. Because it begs the question – what happens WHEN (not IF) COVID cases begin to fall in the US?
While the news still appears very dire, there is evidence emerging that the end of the pandemic is closer then we all might think.
There is a growing body of evidence that herd immunity can be reached at a lower level than originally thought.
The poster-boy for this theory is Sweden, which endured a very rough spring, but where cases have virtually fallen off the map through the summer even though the country has done little to stop the spread.
This same trend can be seen for New York, in parts of Italy, and more recently in Florida and Texas.
Taking the politics out of the virus has become a difficult task. As I say regularly, my politics have no bearing on my investment decisions. I am interested in what is really happening because that is what matters for stocks.
What I am reading is not coming from right-wing or left-wing conspiracies. It is coming from scientists modeling the pandemic, dissecting the data, and saying: you know what? It really looks like there is a far lower herd immunity threshold than we originally thought.
If this turns out to be the case, the virus will peak earlier than we previously thought. That may not mean “business as usual” in the fall, but by Christmas we could see the light at the end of the tunnel.
The Big Question is – seeing as the market has taken the more COVID = buy stocks view – does the market reverse as cases decline?Because folks—the data is very clear; it’s indisputable. As soon as COVID cases peak, the number of cases comes down very very quickly; it’s a stunningly steep chart:
Whether you’re talking countries, or US states—once COVID cases start to decline, they decline VERY quickly.
I think that could happen OVERALL in the US come September. It is why I have been reducing gold stocks and selling down positions that have been clear beneficiaries of the virus.
Cash went from being your best friend in February and March to your worst enemy in May, June and July. My bet is that we are in for another flip of the switch in the months ahead.
But I am also looking for names that stand to benefit from a COVID peak. While the market decided that COVID was good for stocks in the aggregate, there has been plenty of carnage in particular names. Retail, hotels, airlines, and a myriad of other sectors have taken it on the chin.
Some of these will not recover. Many airlines, hotel chains and cruise lines are already bankrupt.
But others will. What I am noticing is that there are some obvious candidates that have had little long-term damage from COVID and where the market is not assigning much value.
In my story tomorrow, I’ll outline several stocks to consider.