As we close out the week, the best development is the sustained downturn in cases seen in the USA (11 consecutive days cases down vs 7D ago) and equally true of the current epicenter of FL, CA, AZ and TX, or F-CAT. F-CAT and NY tristate and about 21 states, in total, have case prevalence exceeding 12,500 cases per 1mm residents. Assuming a seroprevalence of 10X, this implies these 21 states have seen >12% of their respective population infected. But these 21 states, or 65% of the US population, are arguably at the infection break point, or akin to being closer to herd immunity. That is, the initial vulnerable pool of infected has been exhausted and that is good news regarding the risk of a renewed outbreak.
Below, we discuss the situation of the other 29 states, which is 35% of the population. Collectively, these other 29 states could see an outbreak and if we used 12,500 as the threshold, these 29 states would likely see an additional 515,000 cases. By the way, at the current US cases reported, this is about 10 days of cases. So, it is not like this might be years away.
Markets were understandably unnerved by this tweet from President Trump, regarding a suggestion to “delay the 2020 elections.” For obvious reasons, this simply defies logic and several senior Republicans later countered these suggestions.
https://twitter.com/realDonaldTrump/status/1288818160389558273
It was really timely for us to hold our webinar yesterday (thank you to the clients who tuned in) as our head of Policy Strategy, Tom Block, offered a number of useful insights, not only on this tweet (improbable but possible that either Trump or Biden dispute the election outcome). And while the Senate remains a tight race overall, there is a chance for a Democratic sweep leading to Democratic control of White House, Senate and House.
On the surface, many might suggest a Democratic sweep is negative for markets, but we can see how a D-D-D could be markets positive. Tom Block noted the likely top agenda items, post a Democratic sweep are:
– Repeal (raise) corporate tax rates;
– Modify healthcare programs, perhaps a Federal mandate for Obamacare;
– Ease restrictions on immigration;
Of these, the latter two are market friendly, in my view, because reducing the healthcare burden clearly eases a strain on the American consumer. And regarding immigration, we have done several studies showing the positive effect of growing labor supply (via births or immigration) and there is a number of studies showing the benefit of immigrants on innovation and capital formation.
History shows higher corporate tax rates –> seek tax shield –> higher capex
What might surprise investors is that higher corporate tax rates often leads to a rise in capital spending. The reason, we believe, stems from rational behavior. If tax rates rise, companies seek to shield income, aka, find tax shields. The most obvious tax shield is depreciation and interest expense. And the higher the marginal tax rate, the greater the cash flow benefit of capex and debt. This has borne out in the data.
– There have been 2 eras where US corporate effective tax rates rose, 1966 to 1980 and 2003 to 2007;
– In both periods, corporate capex (as % GDP) rose;
– Interestingly, in periods where corporate tax rates fell, capex (as % GDP) also fell.
Source: BEA
In other words, if a Democratic sweep (D-D-D) happens, we could see US capital spending rise –> outperformance of Cyclicals.
STRATEGY: Worst GDP print in history published yesterday. Was the “bell rung” on the economy?
Yesterday, US 2Q GDP was reported, and it is the worst ever contraction ever in US history at a 34.5% annualized decline. This is worse than even the Great Depression. Is it any wonder why investing has been so challenging in 2020? This is the worst ever economic disaster in 5 lifetimes. But as we have written about in multiple commentaries, investor sentiment already reflects this, and cash balances show high levels of skepticism. And in the meantime, stocks historically bottom before the economy bottoms (which has happened).
The equity market reaction to this GDP print was pretty muted. Granted, this was widely expected, and this is simply the GDP report itself. But isn’t this also the most unimaginably bad headline one could imagine?
A week does not a trend make, but have you noticed the considerably better performance of cyclical stocks this week? It has coincided with the plateauing of US COVID-19 cases. And as we commented, if the June-July surge is over, investors will eventually see the roadmap for the re-opening thesis.
What stocks were hardest hit since June-July COVID surge but have positive fundamental characteristics?
Investors are favoring momentum stocks. And as we highlighted in our framework, this is logical if the COVID-19 virus is spreading at a faster rate. But we expect this to shift when investors are convinced the disease is receding.
Overweight Granny shots – a good combination of core/ epicenter/ thematic ideas…
We understand many investors are still skeptical of any improvement of COVID situation in the US. However, in both the absolute number of new cases and the 7D change of new cases (“seasonality adjusted”), we are seeing the cases are rolling over.
Since the start of the pandemic, when the cases are declining, the market rotates from growth to the epicenters. Hence, we expect this rotation to happen again as the cases in the epicenter states are trending down.
Below is our Granny Shots list. This is a good combination of i) core secular growth names; ii) epicenter stocks and iii) stocks that benefit from longer-term thematic tailwinds.
YTD, our Granny Shots strategy has outperformed the S&P 500 by more than 2,000 bps. And as the monthly performance chart shows, except for trailing 120 bps in March, Granny Shots have been consistently outperforming the market each month in 2020.
POINT 1: USA daily cases come in at 69,071, up vs 1D ago but down -1,839 vs 7D ago… still affirming past peak
Total USA COVID-19 cases came in at 69,071 which is up +5,444 vs 1D ago and a pretty typical mid-week pattern. But as we have commented, the key is whether this is higher or lower vs 7D ago. This is actually -1,839 lower than 7D ago.
– so we are now 11 days in a row where USA daily cases are lower/flat vs 7D ago.
– this is clearly a break in trend.
Source: COVID-19 Tracking Project
In a way, this chart below remains the most important to judge trend. It is comparing daily cases vs 7D ago and is a leading indicator of moving averages (naturally) and also a crude proxy for R0. A decline vs 7D ago is essentially suggesting virus path is weakening.
Source: COVID-19 Tracking Project
This break in trend is also true in each of the 4 epicenter states, FL, CA, AZ and TX, or F-CAT. As you can see below, these 4 states have a sustained decline in reported daily cases vs 7D ago. The most pronounced are for AZ and TX. But it is also true of FL and even CA.
Source: COVID-19 Tracking Project
6 states had a sizable 1D increase in cases
California 10,197 vs 8,755 (1D) +1,442
Georgia 3,963 vs 3,271 +692
North Carolina 2,344 vs 1,763 +581
Alabama 1,980 vs 1,416 +564
Florida 9,956 vs 9,446 +510
Illinois 1,772 vs 1,393 +379
Total 6 states +4,168
6 states with a sizable 1D decline
Michigan 715 vs 996 (1D) -281
New Jersey 204 vs 471 -267
Texas 8,800 vs 9,042 -242
South Dakota 44 vs 149 -105
Washington 780 vs 884 -104
New Mexico 252 vs 345 -93
Total 6 states -1,092
Source: COVID-19 Tracking Project
Daily deaths are creeping up, but this is a predictable lag to the surge in cases. The good news is the rate of daily deaths has not matched the pace seen in March/April despite a considerably higher number of reported daily cases. The rise in daily deaths is really coming from F-CAT as this chart below shows.
Source: COVID-19 Tracking Project
POINT 2: 35% of the US case prevalence too low to expect “infection break point”
One of more impressive outcomes has been the crushing declines cases seen in NY tristate, along with MA and Rhode Island. The chart below highlights daily cases per 1mm residents and the series are all rebased day 0 is the date of peak cases.
Source: State Health websites
But one of the reasons these states have not necessarily seen a resurgence is their overall case prevalence was high. This chart below shows the cumulative cases per 1mm residents and these states have cases per 1mm residents >12,500.
– FL and AZ are well above this and TX, incidentally, is crossing this level. CA is just nearing this line.
– At 12,500 cases per 1mm residents, it is a case prevalence of 1.25% and using serology estimates, this implies >12.5% of the population is infected (10X).
While NY and NJ are considerably higher at 2.0%, or 20% as a proxy, these states are probably closer to true herd immunity.
Source: State Health websites
How many states case prevalence >12,500 per 1mm?
So the natural question is how many US states have case prevalence >12,500? Our data science team, led by tireless Ken, have put this graphic together. It is looking at the cumulative US population that has case prevalence >12,500. This is based on states. We have the county data, but the number of plots is so numerous, one could not really see the text labels.
– Louisiana, Arizona and Florida have the highest case prevalence in the US, all exceeding NY/NJ.
– 65% of the US overall has a case prevalence >12,500, suggesting nearly two-thirds of the USA has sufficiently high levels of case prevalence.
– the most vulnerable states are Hawaii, Vermont, Maine and Montana (see right side).
Basically, we believe states with high case prevalence have also depleted a large pool of vulnerable population and therefore less likely to see massive spread. This will be an issue during the expected second wave this Winter.
Source: Fundstrat
The US may reach an overall “infection break point” with another 515,000 cases, which could happen in the next 30 days…
Another way to think of this is to ask, how many additional cases are needed for the rest of the states to reach 12,500 cases per 1mm residents. Granted, this is merely one line and does not necessarily represent where infections stop (case in point, AZ and FL). But it is a useful guide to understand how much further spread we can expect.
– There are 29 states with case prevalence <12,500 and this is 35% of the USA
– An additional 516,552 cases would push these 29 states to 12,500.
– At the current pace, we could see this level reached in the next 30 days or so
– Pennsylvania, Michigan, Ohio, Washington could see the greatest surge.
This is simply an exercise. COVID-19 is unpredictable.
Source: Fundstrat
But it is interesting to think about the potential depletion of the vulnerable population. And while many may fret there will be further cases outside of F-CAT, the number of states involved and even the potential vulnerable pool is smaller.
POINT 3: Economic growth stalled as cases surged, as cases recede, expect a surge…
The latest McKinsey survey shows the growing gloom among US corporate is rising, which is not entirely surprising given the June to July surge in COVID-19 cases. In fact, this is entirely logical. But if we are correct, and US COVID-19 cases are set to crash, we should see confidence rise.
https://www.mckinsey.com/business-functions/risk/our-insights/covid-19-implications-for-business?cid=other-eml-alt-mip-mck&hlkid=b337566ce5d14790955b245d9fc3ffdc&hctky=9489327&hdpid=7f8d641b-28a1-41b6-ae15-690985c72561
But one of the key issues remains liability management as the economy re-opens. This is one of the negotiating points in the Republican version of the CARES Act bill (limit liability). As the WSJ story below highlights, workers are already starting to file lawsuits. Ultimately, this raises the importance and the binary nature of a vaccine and/or a cure.
