WSJ headline today seems to suggest that we are much farther from putting covid19 behind than we or equity market thought. It is unclear whether this is “priced in” but my bet would be that it is not.
The reason is that we have seen over the past two weeks a huge rotation of capital away from covid19 beneficiary stocks and high growth names (there is a lot of overlap there) into more cyclical, “value” names as investors expected the rapid and strong execution of vaccination paints a great recovery picture of these “depressed” names.
One statistic from the article stands out – US government promised 20million vaccinations by the end of 2020 through Operation Warp Speed (which carried the cyclical names higher and served as a backdrop for re-opening trade for 2021), and of the 20million that were promised, only 2.8million were administered at the end of 2020. Below schematic shows that most states have only given a small minority of allocated vaccines (lighter means fewer % of shots given as % of total allocated doses).
If US government is a company, they guided to 20mm and raised investor expectations, but only delivered 2.8mm – this is not a very pretty picture.
Bigger issue is that the poor execution is not to be easily solved because the issue at hand is more structural to the US government and our political system – federal government has delegated the responsibility to individual states (maybe being respectful of individual state rights or federal government is already super stretched – both can’t be fixed in short amount of time) and each state is making independent decisions as to how to distribute the vaccines (some are hands-on while others are delegating to hospitals).
Hospitals also have some individuals that are refusing vaccinations – to be honest, this is completely understandable particularly given the limited safety database so far. Pre- and post-dose observation period, covid19 testing, limited federal funding to support vaccine roll-out – all of these are adding to the logistical nightmare.
This is leading to an unfortunate situation where covid19 recovery may be delayed – my structural impact from the delay is as follows:
- High leverage companies are once again entering a period of uncertainty – recovery trade is only good as long as there is visible trajectory to re-opening.
- Covid19-related social dynamics, such as work from home / de-urbanization / supportive IT infrastructure (edge cloud) / telemedicine / digital entertainment, etc., will be even more deeply entrenched as current dynamic will last more than a year for sure.
- Survival of the fittest continues – somewhat similar to above, but market share consolidation is likely to continue as weaker companies continue to exit the market or get acquired.
- Fed will need to continue to print more money and keep the interest low as there is greater uncertainty in the economy – this “temporary” systemic shock still has no visibility on the timing of the end. Fed will need to continue to support the market.
- Due to Fed’s market-supportive policy, asset inflation will increase – particularly in real estate and stocks.
- Potentially, I think the pandemic could lead to much greater federal government – just like civil ware completely expanded federal government (number of government workers, massive mobilization at scale, etc.), this pandemic could expand the role of federal government over state government as the pandemic response revealed some downside of de-centralized authority in the event of a national crisis.
2020 has not been an easy year and 2021 is unlikely to be much easier. The pandemic fatigue is really taking us down mentally. I can’t wait for this to be over – at the same time, I continue to keep my eyes of secular trends.
Link to the article below
