Trump Recovery Positive for Markets; Stocks up 3.8% on Week
If I had to identify the biggest development in the past week, it is the miraculous recovery of President Trump. Recall, earlier this year, many people would have cited a “black swan event” for the 2020 elections is one of the two candidates getting COVID-19. Well, it happened, and in a few days, President Trump seems to be back in good health. And it seems like the ball has moved forward (maybe inches) on incremental progress on fiscal stimulus. This is a good development.
But the progress of COVID-19 has not been necessarily positive. Daily cases are rising and surged to 53,572, the first >50,000 daily cases figure since mid-August (see chart nearby). There is an uptick in daily hospitalizations, but the coefficient is a lot lower. So, we are in that phase where one can credibly dismiss the rise as “more testing” or “mini-surge” but the thing that would worry me, is if this turns into an exponential rise.
This only highlights how important positive progress on therapeutics and/or a vaccine is. President Trump’s recovery seems to be a big win on the cure “column” and if that is correct, this rise in cases is less concerning. That is, because a timeline for a cure is also becoming more visible. Daily deaths are still trending lower and for the moment, that is the good thing. In the US, about 700 Americans are dying each day from COVID-19. This is about 260,000 per year, so it is not a number to be ignored. And the key issue is keeping daily deaths low.
A decent benchmark for measuring the rate of spread in a state is daily cases per 1mm residents. A level of 100 per 1M ends up annualizing to an annual confirmed rate of 4% per year. So, keeping daily cases <100 is a level of “contained spread”. This week we looked at the top 20 states in the US by level of GDP and 8 of these top 20 states have daily cases at less than 100 per million which I view as a positive and calls into question some of the new stricter measures being implemented in states such as New York.
Strategy: Would there be any substantive differences in sector views post-election?
The short answer to this question is no. The prudent strategy is to build a shopping list for post-election days, rather than optimize returns into early November. In my opinion the post-election strategy is to overweight cyclicals, which I refer to as the epicenter and to sell the “economy closed” winners.
I realize the market is in a waiting game. The game plan from today until election day (next 30 days) is very different than the post-election strategy. Into elections, most investors are risk-averse, fearing two things:
- A contested outcome, and the associated wait (which just pushes off finality by a few weeks)
- Something bad could happen before the election day — ala, delayed election, Trump condition worsens, etc.
So, I can see the jitters over the next 30 days. But neither issue should cause those trades favorable post-election to wither either. Overall, I think President Trump’s recovery seems to be a big win on the cure “column” and if that is correct, this rise in cases is less concerning as the timeline for a cure is also becoming more visible.
In the face of all of this uncertainty brought on by Trump’s diagnosis, rising COVID-19 cases, rising hospitalizations, election related uncertainty, and struggles of getting a fiscal stimulus bill passed, the market has been resilient. The Standard and Poor’s 500 index finished the week up 3.8% at 3,477; well above the 3,224 “line in the sand” 62% retracement level that it reached in late September.
Bottom Line: Now is the time to work on a shopping list. The post-election strategy, regardless of the winner, is to overweight cyclicals or “epicenter” stocks and to sell the “economy closed” winners.
Figure Comparative matrix of risk/reward drivers in 2020
Per FSInsight
Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019
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