COVID-19 remains a global crisis and we realize that many people need to keep up with COVID-19 developments, particularly since we are moving into the more critical stage (“restart economy”), so feel free to share our commentary to anyone who has interest.
This evening, the most significant development comes from the Healthcare side as the University of Chicago’s Phase 3 trial of Gilead’s Remdesivir shows promise (link –> U Chicago Phase 3 trial update). Remdesivir has been talked about for some time so we can understand if many wonder why this has any significance — but the fact is, S&P 500 futures are up 100 points (+ ~3.5%).
Policymakers have pointed to “vaccine” as the key development, and with vaccines 6-12-18 months away, the outlook for re-opening the economy is quite grim if a vaccine is key.
But if COVID-19 spread is 10-20X greater than reported, more like 20%-30% in NYC, not 1%-2% as “tested,” then vaccines are less important than treatment. This is something we mentioned in several of our comments — that treatment > vaccine. Think of it this way, a vaccine means the entire USA needs to be vaccinated and if 1% have side effects (just assumption, not a fact), then this would be worse arguably than catching COVID. On the other hand, a treatment means only those afflicted need to be treated and this is not only more scalable but arguably safer. In some ways, this is how the AIDS epidemic attenuated — by treatment, not vaccine.
But take our observations with a grain of salt.
COVID-19 is a pandemic. It has caused the greatest economic contraction since the Great Depression. It has created considerably uncertainty. And it has compressed news/economic/financial cycles from months to days –> what was normally 12 months of market moves is now happening in weeks.
But one thing we have observed is that control of financial markets has shifted to buyers (the “half full” camp) and this shift took place after March 23, 2020. Consider how we have been receiving completely freakishly bad economic data including today’s initial jobless claims (5.2mm, bringing total losses to >22mm) and yet the S&P 500 ended flat (+0.58%) — never would I have ever imagined 5.2mm jobless claims would lead to an up tape.
The point we are making is that financial markets are now starting to communicate a narrative that seems completely out of sync with what we know lays ahead. The US economy and the global economy are facing a massive contraction and the way forward is so uncertain. But so many financial market indicators strongly argue the S&P 500 has decisively bottomed and a new bull market is underway (50% retracement is more prominent).
I don’t know the future and our own notions of the future have been dead wrong. But it seems like stocks are telling us that the economic recovery path is much stronger than people expect.
POINT #1: US net new cases at 30,604, flat vs 4/15, as New Jersey cases increased 100% to 4,287
US net new COVID-19 cases hovered at 30,604 and did not show an improvement from the day prior. As shown, the 30,604 is still off the 34,617, so we can say “apex” is behind us, but instead of a steady decline in cases, the US is showing a stubborn flatness.
Big mix shift, as NY-state sees 27% drop, but NJ +94%, CA +62% and MA +27%
The state by state mix shift was not favorable. NY state reported a sizable decline to 8,505 (from 11,571) but NJ cases surged +94% to 4,287 and CA +62% to +1,768 (vs +1,086) and MA up 27% +2,263 (vs +1,755 yesterday). One thing we learned from the past 7 weeks is that day by day case counts can be lumpy because of methodology changes, testing proliferation, and other delays. So we will not jump to conclusions. But bear in mind:
– NJ, MA, CA are top 8 states, so if case counts are going the wrong direction — this is bad
– Of these states, NJ cases per 1mm is 8,480, not too far behind NY state (11,426) but MA is 4,669 and CA is a mere 663.
– So NJ is really the only state with epidemic level COVID-19 breakout. The surging numbers there are arguably the most alarming.
What is going on in California and Massachusetts?
The one thing that would be a big setback is to see a massive surge in cases in new areas like California or a resurgence in Massachusetts. The table shows the large counties and sorting those based on 1D case growth (not case count but % increase).
Our data scientist, tireless Ken, shows that MA conducted 8,750 tests on 4/16, which is +52% higher than 4/15 and perhaps this explains the surge. Only 26% of tests were positive on 4/16 vs 32% on 4/15.
Leading this rise is Montgomery, MD with 1D gain of 25% with the largest city being Rockville, MD. We wrote about the DC area a week ago. The updated chart is below and shows that Montgomery has a much flatter trajectory than NYC. So it is not “worse”
In fact, of the counties listed below, we would be concerned about counties with high cases per 1mm residents and daily growth >10%. Using these criteria, the problem area remains NY state. Nassau County has 13,669 cases per 1mm residents yet is still seeing ~12% daily growth and Westchester is a whopping 16,421 cases per 1mm residents and still 11% daily case growth. The epicenter remains NY state.
Montgomery/Rockville, even with today’s jump is tracking WAY better than NYC…
Even with the surge today, Montgomery has a much flatter trajectory than NYC. At this point (rebased dates), NYC had 2X the number of cases per 1mm residents. In fact, the whole D.C. area has a much flatter curve.
POINT #2: Employment impact –> >20mm initial jobless claims, or 13% of the workforce, but what if income impact is <3% overall?
The labor data remains just tragic. This week, 5.245mm people filed for unemployment claims, following on 6.6mm from last week and 6.9mm the week prior. >20mm over the past 4 weeks and about 13% of the labor force.
– By any logical measure, we are in a depression, way beyond a recession.
– But what is different about this surge in unemployment is that is not due to a business cycle.
– The unemployment is a residual of a “social distance” mandate –> not due to a collapse in demand, but a pandemic-driven crash.
This matters because one could argue the business cycle rules are not really at play (i know, you will say it doesn’t matter, a job loss is a job loss).
But consider the income impact so far (this is the March employment report). The 709k job lost, which is a massive number, by any measure, saw jobs lost with a median income of $35,402. This is well below the US median of ~$63,000 or roughly half.
– in fact, the total income lost is less than 0.1% in March.
– If we multiply this by 10X to 7mm jobs lost, this is 1%.
– if we multiply this by 30X to 21mm jobs lost, this is 3%.
The income impact is shockingly small.
The reason for this is the wide income distribution in the U.S. The social distance victim businesses typically hire less skilled labor, with less education and generally younger.
– we stratified US household income by quintiles using the Census data.
– the bottom 20% of households have a median income of $13,775 and account for 3% of US household income.
– the second quintile has a median income of $37,293 and had an income share of 8%
We already noted that the median income of the social distance victim companies is $35,000, or right in the middle of the second quintile.
So if 100% of those workers were unemployed, this is an 8% hit to income. Way less than the share of labor. Collectively, the 40% of lower quintile households are only 11% of income.
This is a long-winded way of saying that the economic hit may be smaller than the market might be thinking.
No doubt, we have months ahead of us with depressingly bad economic data. We think one of the things that we are increasingly observing–the economic recovery could be faster than expected. But in any case, we have 3 waves of COVID-19 misery.
– first wave –> healthcare crisis
– second wave –> unemployment surge from “social distance” victim businesses (restaurants, retail, travel, entertainment, etc).
– third wave –> asset owners — landlords, banks, business owners, suppliers
But stocks bottom before initial jobless claims peak –> is it valid in 2020?
We have noted that in the past, the S&P 500 bottoms 2-4 weeks before initial jobless claims peak. This is what happens in a normal business cycle. 2020 is not a normal cycle.
So we are not confident this is true.
But if this is true, it looks like initial jobless claims peaked 2 weeks ago, during the week ending 3/27/2020.
– if so, then perhaps 3/23/2020 would logically be the low.
On an editorial basis –> yes, this is our view. But we do not want you to argue with us on this point. We are just observing this is our conclusion and believe the bottom is in.
STRATEGY: THE WAY FORWARD –> ASSET HEAVY + DE-URBANIZATION + WORK FROM HOME + the USA
We have been suggesting that the best opportunities are the “buy the epicenter” — stocks that are the victims of social distance. Consumer Discretionary, Industrials, certain Financials, etc.
And this is a playbook that worked as early as October 2008 during the GFC.
But we want to provide a glimpse of what we think works beyond the immediate term. Below is our “way forward” framework for stocks.
We think 4 structural changes will take place in the US economy:
– supply chain moves back to the US (away from Asia)
– de-urbanization as millennials want less density
– work from home reduces office demand and reduces commuting
– The US is the best neighborhood
And as shown below, this should lead to an infrastructure and asset boom in the US. What are the best US assets? Technology, Healthcare, and Financials. But if millennials start buying homes, this is housing + housing-related and consumer discretionary broadly.
FYI, yesterday, we pointed out that weak consumer confidence = best time to OW consumer discretionary (see below).
Have a great evening. It does look like the COVID-19 is tracking better than the base case for the White House at the moment.
