Let’s examine five trends developing right now that are inextricably linked and could provide clues into how the world will look in the coming years. None of these can match the excitement of meme stocks or over-levered hedge funds, but their lack of media attention is precisely why it’s critical to keep them on our radar.
- We are winning
Herd immunity is the threshold where COVID-19 will no longer be able to transmit effectively. This is estimated to be around 70% of the U.S. population. The chart below suggests that we could be a lot closer than the media may like us to believe.
The blue bars indicate the number of positive tests in the U.S. (currently 32 million1). The CDC estimates testing only finds about one out of every four infections because most people infected don’t get tested2. If so, then over 120 million Americans have antibodies from prior infection (orange bars). These two bars alone represent 40% of the U.S. population.
Approximately 44% and 32% of Americans have received the first and second shot respectively3. Combine prior infections with full vaccinations and close to 70% of the U.S. population have antibodies today. Sure, there may be some double counting (infected people who also got vaccinated), but it’s unlikely to materially slow the overall trend towards herd immunity.
- Services are catching up
The next chart compares the personal consumption of goods (red line) versus services (blue line) in the U.S. Last year, shutdowns decimated both. Stimulus, unemployment benefits, and high-income earners’ ability to work from home fueled a near immediate rebound in goods because online shopping was safe. But services languished because leaving the house to eat lunch was viewed as dangerous.
This trend appears to be reversing. The sharp rise in services starting in February began right after cases and deaths
plummeted. The closer we get to herd immunity, the faster these two lines reunite.
It’s also likely that this convergence will remain elevated well above the pre-COVID average of around 5%. Consumers are sitting on trillions in their bank accounts, incomes are at all-time highs, and more government spending is coming our way. All of this should fuel economic growth this country hasn’t seen since post World War II.
- Lumber prices keep rising
The chart below shows that lumber prices have quadrupled over the last year due to increased demand for housing and supply chain disruptions. Lumber has estimated to have increased the price of a new single-family home by $35,8724. But raising prices is currently a luxury for most builders. Large corporations are pretty much the only buyers capable of finding enough lumber to build anything more than a tool shed.
Lumber is emblematic of what most other commodities are experiencing (albeit not quite to this degree). From copper to coffee, commodities are rising because too much money is chasing too few goods.
- People are moving (slowly)
Americans do appear to be leaving higher-cost states like California and New York, but the chart below suggests that it’s not a mass exodus. At least not yet.
Digging deeper, the chart below shows that people are also leaving high-density urban areas for more space (one reason why lumber prices have surged). While these numbers may appear to be small today, it’s a trend worth watching closely because the implications of population changes can be significant over time.
For example, the graphic below shows the impact of the first set of results from the 2020 census. This could reset the balance of power for the next decade in the House of Representatives and the Electoral College, where each state's share of votes is tied to its census numbers.
- Big Tech is really, really big
There is a financial concept called the “law of large numbers” that states that an entity growing rapidly cannot maintain that growth rate forever. Intuitively, this makes sense. If a company has $10 million in revenue, doubling in size is a lot easier than a company with $100 billion in revenue.
If so, someone forgot to tell this to Apple, Amazon, Facebook, and most other “Big Tech” companies because the earnings they just posted blew away even the most optimistic forecasts. It’s hard to even conceptualize some of the numbers they’ve put up so far, and it’s even harder to see how this growth slows anytime soon.
The chart below shows that the iPad, which is the smallest of Apple’s five segments, made more revenue last quarter than Netflix or McDonald’s. It did more than the combined revenue of Spotify, Twitter, Shopify, and Zoom. The iPhone is Apple’s largest segment and earned $65.6 billion during the first quarter of 20215. That’s almost $6 billion more than Exxon earned over the same period7. Amazon’s web service business earned $48 billion in 2020 and is growing at 30% annually8. I can’t think of a single company in any industry outside of tech growing like that.
The bottom line is that the momentum these companies have created is unlike anything the world has ever seen. Nothing lasts forever, but it’s going to take a lot more than regulation to slow them down.
Sources
1 https://covid.cdc.gov/covid-data-tracker/#cases_totalcases
2 https://www.ftportfolios.com/Commentary/EconomicResearch/2021/2/10/immunity-is-closer-than-you-think
3 https://covid.cdc.gov/covid-data-tracker/#vaccinations
5 https://www.statista.com/statistics/263402/apples-iphone-revenue-since-3rd-quarter-2007/
7 Bloomberg
8 https://www.statista.com/statistics/422273/yoy-quarterly-growth-aws-revenues/
Disclosures
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.