Market

Could the US follow Austria on Covid?


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We are still riding successive waves of good and bad news on Omicron, all in the absence of much conclusive information. But there is more to the Covid threat than the new variant. We are keen to hear your thoughts. Email me at robert.armst[email protected] or Ethan at [email protected].

Might America pull an Austria?

During markets’ Omicron sell-off on Friday — a good chunk of which was recovered yesterday — the first thought that occurred to me was that the market might be overreacting to the new variant. The second thought I had was that, even if that was true, the market might still be too sanguine about Covid. The reason for that second thought was Austria.

Here, from Our World in Data, is what Austria’s autumn Covid surge looks like, compared with that of the US:

That leap since mid-October has been nasty, and as a result, the country has rolled out, first, lockdowns for the unvaccinated and, second, plans for mandatory vaccination starting in February. The FT’s editorial board put the blame directly on failure to vaccinate more people earlier:

Austria’s problem — as in other German-speaking areas and elsewhere in central Europe — is the large number of vaccine refuseniks nourished with conspiracy theories then amplified by far-right political parties.

Well, here is Austria’s vaccination rate compared to that of the US:

Austria’s vaccination rate has been as high as the US’s since July. Why wouldn’t we conclude that the US is vulnerable to an outbreak of Austrian severity — in which infection rates septuple and death rates sextuple in a matter of weeks? There are several US states with populations at least the size of Austria’s with even lower rates of vaccination (Texas, Michigan, Georgia and Ohio). 

It is hard to say what the economic and market impacts of such a wave would be. As discussed in Monday’s letter, US lockdowns seem all but politically impossible now. But — for starters — there would surely be an effect on people’s willingness to rejoin the workforce, with real implications for inflation. If wages are squeezed upwards even as the economy slows, the Federal Reserve would be in a nasty dilemma.

Are there factors that might mitigate America’s vulnerability to a big Covid jump, relative to Austria’s? One was pointed out to me by John Burn-Murdoch, the FT’s chief data reporter, who has been thinking about little besides Covid numbers for many months now. He noted that the first wave of Delta infections hit America harder than Europe, meaning there are higher levels of immunity by infection in the US. This can be roughly approximated by dividing the number of confirmed cases in a country into its population (it’s a very rough approximation because an unknown number of Covid cases are not reported). 

At the beginning of October, before the jump, confirmed cases/population in Austria stood at 8.3 per cent. As of Thanksgiving week, the figure for the US was 14.5 per cent, and significantly higher in some southern states — 17 per cent in Florida and 15.6 per cent in Georgia, for example.

This offers some reassurance. But the point remains: scepticism about the added risk to markets from Omicron (Unhedged’s view, until we know more) does not justify a dismissive attitude toward Covid risk overall.

The case for Twitter

The consensus sentiment that met Jack Dorsey’s resignation as Twitter’s chief executive on Monday was “good riddance”. The story goes that Dorsey split his attention between Twitter, Square and taking crypto pilgrimages to Africa. As a result, Twitter’s product development has crawled along, US user growth has stalled, and profits have been meagre at best.

The performance of the stock, it must be conceded, has absolutely stunk, even when compared to middle-tier social media groups:

But there are important silver linings to the Twitter story. While profits have disappointed, revenue has marched upward at a 16 per cent compound annual growth rate over the past five years. Twitter has added 60m “monetisable” (ie, ad-viewing) users since the start of 2020, bringing the total to 211m. These numbers don’t blow us away, but they do represent real momentum.

Most important, Twitter enjoys immense cultural cachet among the world’s elite. Donald Trump decreed US government policy via Twitter. Taylor Swift declared a cold war against record labels on the platform. Journalists the world over have replaced newswire subscriptions with Twitter feeds.

It’s strange to say, but what really bugs us about Twitter is its stubborn cost base. The company’s overheads hover between 30 to 40 per cent of revenue (Facebook’s is at 20 per cent). That figure is in line with Snap, but Twitter has made less progress than Snap over a longer time. Twitter has also spent sizeable sums on R&D — a quarter of revenue — to produce a meagre flow of innovative features.

Innovation is hard, admittedly. But spending discipline shouldn’t be. Given Twitter’s cultural clout, a few quarters of healthy profits could restore confidence in the management, buying the company more time to innovate. There is no reason a platform with the outsize influence of Twitter should be a financial mediocrity. (Ethan Wu)

Growth, value and interest rates

It has become a piece of accepted Wall Street wisdom that as interest rates rise, growth stocks will underperform value stocks.

The justification for this notion goes like this: growth stocks derive more of their value from profits that are farther in the future; interest rates are the discount rates used to determine the present value of future cash flows; therefore higher rates, which will lower the valuations of all companies, will hit growth companies particularly hard.

That’s right mathematically, but the pattern does not always hold. Below is the performance of the Russell 1000 value index relative to the Russell 1000 growth index, charted against the 10-year Treasury yield. In the past few years, falling yields have indeed reliably coincided with outperformance by growth, and rising yields with outperformance by value. But not lately (see arrows at right):

Since August, yields have basically been rising, and growth has been outperforming anyway. I’m not sure what this means, but I’d be keen to hear readers’ thoughts. It’s certainly consistent with the market’s apparent view that inflation will prove temporary.

But historically there have been long periods where the correlation just didn’t hold at all, including more than a year in 2017-18. To say nothing of the years after the great financial crisis, when rates fell steadily and value outperformed wildly.

A longer-term view: the relationship between interest rates and the stock market is complicated.

One good read

The FT’s Edward Luce makes the case for Joe Biden getting tough on vaccine resistance — in order to control the political risks posed by inflation.

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