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Welcome to RBC’s Markets in Motion podcast, recorded August 16th, 2021. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers. This week in the podcast, we’re taking a closer look at the recent impact of the COVID backdrop on the US equity market. The three big things you need to know: (1) First, COVID has taken up more airtime on earnings calls in August, and the tone on the variant has been mixed. (2) Second, we’re seeing more pronounced signs of stress in the high frequency indicators we track. (3) Third, for the most part, the US equity market has remained forward looking, focusing not on the impacts of the latest surge but on the continuation of the recovery thereafter.
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Takeaway #1 – COVID’s been getting more airtime in August earnings calls, and the tone has been mixed.
- Aside from a few companies that rang the alarm bell in week 1 of reporting season, for the most part the July reporters within the S&P 500 described COVID and the Delta variant as a manageable issue that could cause come bumps in the recovery, but would not derail it.
- That’s also the view of many of the August reporters, but not all. Among companies that have commented on the Delta variant in their earnings calls between August 2nd and 11th, 60% expressed a concerned or uncertain tone, including 36% in the concerned camp and 24% in the uncertain camp. Meanwhile, 39% expressed a confident tone, similar to what we heard in July.
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- In terms of sector biases, Real Estate, Communication Services and Health Care companies expressed the most confidence. Within Communication Services, Media and Entertainment companies were generally in the confident camp. Within Health Care, Providers were more of an exception expressing more of a concerned tone.
- Meanwhile, Consumer Discretionary and Financials stood out as the sectors with the most concern, particularly in Travel, Hotels, Leisure, Apparel, Autos/Auto Parts, and Insurance.
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- In terms of points of concern, popular topics have included potential restrictions and specific losses associated with the surging cases of the variant in the near term, negative impacts from lockdowns in international businesses, and the potential for further supply chain disruptions.
- In terms of points of optimism, a number of companies have emphasized the strong demand they are experiencing, optimism on vaccines, and the unlikelihood of lock downs domestically.
- It’s also worth noting that while several companies have talked about seeing a slowdown because of the variant, others have said the complete opposite.
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Takeaway #2 – This shift in tone from companies has coincided with more pronounced deterioration in high frequency indicators.
- In our latest updates, Opentable dining activity and TSA dining trends have become a bit more sluggish than what we’d been seeing previously, and public transit data has taken an even more noteworthy hit.
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- Though the Opentable data is holding up better than we might have anticipated, one thing that really strikes us about it is that the deterioration in activity has been broad based across the country, with trends slipping over the past two weeks for the vast majority of states, not just those in the states hit hardest by the Delta surge.
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Wrapping up with takeaway #3 – for the most part, the stock market has been looking through the immediate Delta impacts and has instead been looking ahead, focusing on the continuation of the recovery.
- As regular listeners of this podcast are probably aware, we’ve been highlighting how the reflation trades in the US equity market have been tied to trends in domestic COVID cases for quite some time. Since March of 2021, the Growth/Value trade has been moving in lockstep with the 7 day rate of change in the 7 day average of domestic cases. The same has been true of Secular Growth sectors relative to Cyclicals, Defensive sectors relative to Cyclicals, and Large Caps relative to Small Caps.
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- In the spring and summer of 2021, deterioration in the rate of change of new COVID cases coincided with a major peak in Value, Small Caps, and Cyclicals and renewed leadership by Growth, Large Cap, Secular, and Defensive. But since mid-July, when the rate of change in growth in new COVID cases started to decelerate, i.e. improve, Value and Cyclicals stabilized and then began to outperform.
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Around the same time, we also saw that Small Caps stabilized relative to Large Caps.
- Back in the spring the US equity market sniffed out the surge in COVID cases that ended up happening this summer, and over the past few weeks the US equity market has begun to price in the idea that a peak in case counts is around the corner.
- This is basically in line with our Biotech team’s view that US cases will peak shortly before Labor Day. If they are right, the Value, Cyclical, and Small Cap trades should end the summer on a high note.
- Whether this ends up being the start of the “last hurrah” for Value and Cyclicals broadly that we recently called for remains to be seen. It’s certainly possible, but the risk in the short term is that there may end up being more unexpected damage to earnings and economic data from the Delta variant than investors appreciate. It’s also worth keeping in mind that our Biotech team thinks post Labor Day case counts are likely to hold steady at levels well above early-summer lows due to school/workplace reopenings, before transitioning to a less dramatic seasonal virus around year-end – meaning this bump in the recovery might be a bit bigger than many expect.
- On this point we’ll leave you with one quote from a Consumer Staples company on their August 5th earnings call that we can’t get out of our minds. They said: “Just a few weeks ago, you wouldn't have forecast a type of Delta variant and pandemic disruptions that we're seeing again in North America.” That’s a good reminder, in our view, that vigilance in assessing current market conditions remains critical.
That’s all for now, thanks for listening, and please reach out to your RBC representative with any questions.