“It is the knowledge of the way in which the disease is propagated which will cause them to disappear.”
- John Snow
John Snow’s cholera map is a well-known epidemiology study that is credited with ending a deadly cholera outbreak in London in 1854 and fundamentally changing how we thought diseases spread. In 1854, experts believed cholera was spread by miasmas, or foul smells from a sewer or swamp.
As expert theories go, The Miasmic Theory did not hold up although it had a good run. First proposed by Hippocrates in the fourth century BC, it lasted 2,200 years, and as theories go probably worked pretty well to keep people safe by respecting what their senses were already telling them.
John Snow broke 2,200 years of dogma by plotting dots on a London city map during an 1854 cholera outbreak. By plotting the location of each person who contracted cholera on a map, it becomes clear there is a cluster of cases around the Broad Street water pump.
The legend says that John Snow famously went down to the Broad Street pump and broke the handle to stop the outbreak.
Back to the Health Care Macro Grind…
Miasmic Theories have parallels even in our modern era of stock analysis. Healthcare has been underperforming recently, and it is natural to want to understand why. Some explanations blame rotation and uncertainty about Biden policy.
If we lean toward miasma-like explanations, we use our senses, what we read, and what other people say, or as they did in 1854 London, what we smell.
Those anecdotes are useful, but only if we find a way to plot them on the map. Data with a good narrative can be a powerful combination.
We think Healthcare is underperforming because estimate trends lag every other S&P 500 Sector heading into mid- 2021, while other sectors are accelerating. In MicroQuad terms, the slope is in MicroQuad 3, which in any Macro Quad means reduced long exposure. In the current Macro Quad 2 environment, the back test tells us we want to be long reflation. The best sector exposures are Tech, Consumer Discretionary, Financials, Energy, and Industrials.
The worst sector exposures are Telecom, REITS, Consumer Staples, Utilities, and Healthcare. The MicroQuad trends agree with that sector positioning although allow a second level of ranking. Now, we have two data sets agreeing that Healthcare is likely to underperform. Additionally, we can look even deeper and see that Healthcare Services are in worse shape than Healthcare Equipment.
The reopening is likely to be a massive tailwind for medical spending, but it will not be evenly distributed. We think the massive government spending on COVID-19 that flowed primarily through service providers is a difficult compare that will mask some of the upside even with 40% of survey responses reporting delayed medical care because of COVID-19.
There are still stocks to be long in Healthcare, and we are positioned for re-opening where we think we have the biggest upside. Nevertheless, we are not afraid of the short side here either, which can be dangerous in Macro Quad 2. There are plenty of sectors that look more attractive, but that’s not a subjective comment, it’s just the data.
If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.63-1.78% (bullish)
UST 2yr Yield 0.13-0.18% (bullish)
SPX 4015-4143 (bullish)
RUT 2172-2304 (bullish)
NASDAQ 13,084-14,031 (bullish)
Tech (XLK) 133.61-141.99 (bullish)
Energy (XLE) 48.11-51.63 (bullish)
Financials (XLF) 33.70-35.28 (bullish)
Utilities (XLU) 62.90-65.45 (bearish)
Shanghai Comp 3 (bearish)
Nikkei 29064-30149 (bullish)
DAX 149 (bullish)
VIX 15.01-20.26 (bearish)
USD 91.66-93.13 (bearish)
Oil (WTI) 58.03-63.10 (bullish)
Nat Gas 2.42-2.67 (bearish)
Gold 1 (bearish)
Copper 3.95-4.18 (bullish)
Have a great weekend,
Tom Tobin
Healthcare Sector Head
