COVID-19 UPDATE. As NY/NYC plurality of evidence pointing to "apex" already in, investors need to see "half-full" arguments

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It’s Sunday night, and unlike the many nights of the past six weeks, there is a diminishing sense of dread about the next day.  For whatever reason, there were a couple of positive developments that seem to have happened on Sunday.  Among them, NY state posted a notable drop in hospitalizations and deaths, sufficient for Gov. Cuomo to cite what I perceived as a positive tone.  And the White House briefing this evening also cited that cautious optimism that healthcare resource utilization is tracking even better than their optimistic case.  And in Europe, Italy and Spain are showing sustained improvements in the drop in daily new cases.

Perhaps the UK remains somewhat of a concern as new cases surge there and PM Boris Johnson required hospitalization. The UK was slightly later in mandating strict social distance measures.

But let’s look at the improving complexion of the data.



POINT #1: NY State / NYC showing sustained improvements and possible NYC already peaked on cases but deaths should lag…
We wrote an earlier brief today on NY state so we will not repeat ourselves but the high-level observations were.  The developments were surprisingly positive that we decided to send a bulletin shortly after his press conference:

– Daily new cases +8,327 (4/4) down from recent two days of 10,841 (4/3) and 10,482 (4/2)

– Daily deaths flat+594 (4/4) vs 630 (4/3) and 562 (4/2)

– Drop in hospitalizations?  wow…Total new hospitalized +574 (4/4) vs 1,095 (4/3) and 1,427 (4/2) <– HUGE decline in past 3 days

– Flat Intubations+316 (4/4) vs 351 (4/3) and 260 (4/2).

– Exponential rise in hospital discharges Daily hospital discharges +1,709 (4/4) vs 1,592 (4/3) and 1,452 (4/2).


New York City cases remain flat at ~4,000 per day since 3/25/2020 (12 days and running)… meaning cases 2X every 12-13 days now.  PRETTY CLEAR NYC SHIFTING TO LINEAR from EXPONENTIAL and hopefully soon to DECLINE…

NYC reported its latest COVID-19 data this evening (5 pm) and the results are highlighted below.  In short, NYC’s overall cases remain flat at 4,103 (flat with ~4,000 since 3/25/2020). The cases are still growing by 4,000 per day, but given the base effect, the case grow is now 6%, implying cases double every 12-13 days.  While high, this is certainly more linear than exponential.

– the improvements are seen across 5 boroughs and Queens still has an elevated case count +1,410 vs Manhattan at 470.
– NYC put in its strict measures on 3/15/2020, so if cases peaked on 3/25/2002, that is roughly 12 days after measures in place.

Deaths should lag new cases by many days, as patients in hospitals could succumb to COVID-19.  But as shown below, the daily death trends have been lumpy.  Manhattan reported 13 deaths today, down from +37 and +49 the prior two days.  The death figures should be quite lumpy.

POINT #2: IF NY PEAKING + TOP 8 STATES OUTPERFORMING NY = BEATING OPTIMISTIC CASE.
NY State saw the worst outbreak and fortunately, incoming data suggest NY state might peak sooner than Cuomo’s optimistic case.  And once NY is past its apex, investors can use this as a framework to model the rest of the country.  The good news is that the US is tracking to outperform even the best case scenarios. 

The top 8 states continue to be flattening the curve well ahead of NY state, with exception of NJ
The top 8 states (50% of GDP) continue to show a promising flattening of their respective curves.  For instance, while CA is still seeing 11% daily case growth (2X <7 days), their case count is 340 per 1 million residents.  NY state at this same point in the crisis (day 0 = 100 cases) had 5,000 cases per million.

– CA at 340 / 1mm means 1 in 3,000 residents have tested positive for COVID-19.  NY state currently has 6,273 per 1 million, or 1 in 159 residents have tested positive for COVID-19.  HUGE difference.

– thus, if the top 8 states can bend these curves, this will be a major positive as this points to fewer healthcare resources required.

To provide a fuller picture, we constructed the chart below.  This chart shows the top 25 states in the US (sorted by GDP share) and the current case count per 1 million residents.  

– NY, NJ and even Louisiana stand out as anomalies as the penetration of COVID-19 stands so much greater than other states.

POINT #3: MAJORITY OF STATES (39) CASE GROWTH SHRINK TO <10% PER DAY VS MAJORITY >20% JUST LAST WEEK
Broadly, states are reporting a slowing of daily case growth.  The chart below shows that we have seen a flip, where more states have daily case growth <10% vs the majority >20% just last week.  This is a good crossover.

We have converted the daily case growth math to how many days to double cases.  As shown, a 10% case growth is a doubling every 7 days.  A case growth of 5% is doubling every 2 weeks.  

– 7 states have case growth of 5% or less.  Maine, Missouri, Louisiana (fluke?), US VI, Puerto Rico, Wyoming, and Nevada.

POINT #4: MARKET IMPLICATIONS: MARKET IS SHIFTING TO A HALF-FULL PERSPECTIVE, AS CASES PEAK…
For most of the past 6 weeks, price discovery was non-existent, as the combination of an economic sudden stop, coupled with hysterical pandemic fears in the public and investors, coupled with market dysfunction causing systematic strategies to implode, resulted in the fastest ever market crash.  Even faster than in 1987.

And while markets were reeling, sellers were no doubt in control.  But with better visibility on the healthcare crisis in the US, particularly, on the potential to model a national peak, we believe buyers are now taking control.

–  Naturally, there remains a significant economic shutdown and associated risks.  But as we have highlighted in recent reports, stocks will recover well ahead of the actual GDP recovery. 

–  And moreover, we continue to believe there will be significant symmetry of this market recovery.  As we discussed in past reports, the 10 precedent declines of 30% or more, saw symmetry.  It took 0.5X the speed of decline to recover 50% of the drop.  And 2.5X to recover to prior highs.  This seems incredible, but this is precedent.

So consider the below the checklist for why someone should have a “half-full” view of markets.  

CHECKLIST FOR WHY THINGS COULD BE HALF-FULL…
•New York, bleeding edge, outperforming baseline = faster return 
•Other states = 50% GDP, outperforming NY State
•Treatment = positive developments, accelerating reduction in fear
•Policy steps have been ‘lightning-fast’ = reduce downside risk
•US equities bottom on jobless claims peak, not employment bottom 
•Regardless of economic contour, L-, U-, I- or V-shaped, equity recoveries are V-shaped

In October 2008, investors made $$$ buying the epicenter of the GFC, even as stocks fell another 20%
It is entirely logical for someone to say the economic recovery is very uncertain.  It is certainly is:

– we don’t know how deep the contraction will be
– we don’t know how long the recession will last
– we don’t know which businesses will recover

Because of this, our bearishly inclined clients (at least half, based on my conversations) see the S&P 500 falling to 1,700, which would be a 50% peak to trough decline.

We believe the downside is limited, for two reasons: (i) because policymakers acted so quickly, both Fed and White House; and (ii) this was not a business cycle, its a pandemic cycle.  And we think the key is abating consumer fear (and market fear) which arrives in stages:

– stage 1 is the perceived peak in the crisis (based on cases).  This is soon.  And look at how Italians fear diminished.
– stage 2 is a healthcare solution, either a treatment regiment or a vaccine.  That will happen.

Already, we are seeing some bears turn positive this weekend.  See the Bill Ackman tweet below.

BOTTOM LINE –>  BUY THE EPI-CENTER. Similar to 2008-2009, we think the “epicenter” will see a fierce bounce…
We hosted a call last week (hopefully you tuned in) but the upshot is that the entire strategy team, Rauscher (global portfolio strategy), Sluymer (Head of Technical Strategy) and myself, see big opportunities in the groups that crashed.  The ones suffering from this economic heart attack.

We all agree that these social distance victims could see a massive recovery.



Epi-center groups are shown below… those which showed the greatest decline from 2/19/2020 to 3/23/2020 (ex-Energy)
The epicenter group is 26 industries shown below.  These industries suffered massive declines from 2/19/2020 to 3/23/2020.

Why should these stocks come back? Here is the rationale:

– these companies were overwhelmed by social distance measures, which these companies cannot control.
– US policymakers will treat these companies fairly (except cruise lines, due to public fallout).
– these companies often rely on affordable labor supply, which is now abundant due to the economic fallout

We acknowledge the future is uncertain.  But everyone is uncertain.  And from a risk appetite perspective, uncertain = bearish.  

Thus, the positive news is asymmetrically going to aid risk/reward.  And for those who think S&P 500 needs to fall to 1,700, take a look at the groups above.  They have already been massacred.  

– Hotels down 59%. Airlines down 57%.  Appliance makers down 56%.  Unless these industries no longer exist, there are huge declines.

On a final note, this is Psalm Sunday, and we wish everyone a blessed week and to stay healthy and safe.