by Jason Bodner
August 10, 2021
Want the good news first or the bad news?
Before you answer that question, let me tell you how most other people answer that question.
According to a March 2014 paper in “Personality and Social Psychology Bulletin,” 78% of people prefer to hear the bad news first. Maybe that’s why the news media heavily front-load their content with nerve-rattling negativity. When I was young, I noticed evening news was about 20 minutes of death, violence, and disaster, 7 minutes of commercials, 2 minutes of weather, and a 1-minute feel-good story at the end.
These days, our news is blasted all day with tiny bursts of toxic radiation with few “feel good” moments.
Instead, maybe the question should be: “Do you want the bad news first, or the really bad news?
In that light, I went to CNN.com and this was the first thing I saw on their headlines for August 8th:
ALL THE EMPHASIS IS MINE. I annotated the standout words – and I added the red scared face and a green happy face for good measure – so it’s basically a bite-sized version of the old evening news.
Consult any major news outlet, and you’ll find something similar, depending on its bias. All news has a bias, which is why I generally go to allsides.com. It shows you the same story, but with the spectrum of reporting from liberal to conservative. It helps me to know what I am consuming.
I’m not trying to make light of the new surge in Covid-19 cases. Any illness or surge in death tolls is tragic, and I wish it on no one. But the latest headlines are flaring opinions, and stoking rage and indignation without pausing for logic or informed debate. This is not about taking sides, it’s about what effect it will have on stocks, and that is what we want to look at. The latest news cycle is having a whippy effect on several sectors. Constant rotations may worry investors to anxiously wonder, “What’s next?”
My answer to most things is to consult the numbers: Seek cold hard facts. From there, I form decisions.
First, the Covid-19 Delta Variant is getting people nervous. And if that’s not bad enough, as you saw above, they’re now talking about the Lambda Variant! Now we have two Greek letters to worry about.
Let’s do a quick reality check on Covid-19. The fact is that vaccines are working, in conjunction with having learned how to treat the disease. Far fewer people are dying as a percentage of new cases.
I checked coronaviruscounter.com and found the latest figures. We can see new daily cases are rising:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
While that is concerning, the death rate of those testing positive for Covid-19 has not yet spiked as much:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is logical, and some might have expected this. As vaccines arrived, restrictions relaxed. People went out, thinking the vaccine gave them immunity from getting sick. As I found out firsthand, it does not. But it does greatly reduce the symptoms and reactions. That means fewer hospitalizations and deaths.
People go out, cases spike, and the news pounds that fact into us. One potential result is the unvaccinated will think twice and hopefully allow the jab in their arms. For now, the unvaccinated are at the highest risk, and the highest risk group of those are elderly people and/or those with pre-existing conditions.
Just for context, the mid-1300s Bubonic Plague killed 50% (maybe more) of the European continent. In contrast, Covid-19 infected 202 million (2.5%) of the earth’s 7.9 billion people and deaths stand at 4.2 million (0.05% of population) over 19 months. Approximately 150,000 die each day in the world.
Twice as many people die from Diarrhea as from Covid-19, according to this visual comparison:
With those facts out of the way, let’s examine what the latest Covid news is doing to markets. This week rotations jive with the news narrative. Big money is buying big tech and healthcare while selling energy.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The standout tech sector buying was dominated by Software. Businesses such as data, analytics, recruiting, networks, and even online auto shopping were snatched up. On the hardware side, electronic components companies were bought too, mainly semiconductors and WAN networking equipment.
Healthcare companies saw some buying too. Biopharmaceuticals saw a big chunk of it. Unsurprisingly Infectious Disease therapy companies saw buying. On the Healthcare Services side, buying happened in Ambulatory and Outpatient Care, Diagnostics, and Scientific Products companies.
Energy stocks saw selling in Oil and Gas Exploration, Transportation, and support companies. This is also unsurprising, given WTI crude oil’s 7% price slide in a week.
Interestingly, Food Production companies made up much of the Staples selling. Electric Utilities were bought up. With persistent low rates, and some stock market volatility, this is usually a perceived safe corner of equities to park money with its strong dividends.
The most important thing to remember is: This is summer volatility, and August is the usual peak.
Here’s a table of typical seasonality in August (slightly down) vs. September to December (soaring):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As a reminder, history says we should expect choppy returns in August. The 25-year average return for August is -0.49% and the month finished positive only 60% of the time (but including a +7% last year).
So, we’re in the thick of summer bumps.
The flipside is that from September to December, history says we can expect a seasonally strong time of the year. Almost 90% (22 of the 25 years) saw a positive net performance, for an average of +5%.
Covid-19 headlines are stoking anxiety, but maybe that is good news, in that it should help promote more vaccinations. Either way, the long-term trend is fewer deaths and less severe infections. The economy is strong, and earnings are proving it. With 89% of S&P 500 companies reporting results, FactSet says:
- 87% beat EPS (earnings per share) estimates.
- 87% beat revenue estimates. If that’s the final number, it would be a record since FactSet started tracking this statistic in 2008.
- The blended earnings growth rate for the S&P 500 is 88.8%.
The latest scary news, combined with low liquidity and seasonally volatile times, is giving us bumpy markets. Ride out this summer volatility. If you feel at risk, protect yourself. Thankfully, Covid is not as bad as many pandemics of the past, but we still need to get to herd immunity and move on with our lives.
Bad news sells but remember what Morris West said:
“If you spend your whole life waiting for the storm, you’ll never enjoy the sunshine.”
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