There is no playbook for equities in a pandemic. The sudden stoppage to the economy (aka “heart attack”) coupled with dislocations across asset markets (is this due to systematic unwinds?) and the collapse in oil have made equity markets merely a residual calculation of sentiment and perhaps a “liquidity reservoir” (whatever participants cannot accomplish in other assets classes, they accomplish in equity markets). But financial markets are focused on multiple fronts on COVID-19:
(i) rapid spread in the developed world
(ii) financial implications of the “heart attack” on the economy
(iii) lasting social risks post-COVID-19
POINT #1: ECONOMIC HEART ATTACK IMMEDIATELY AFFECTS 26MM JOBS OR 17% OF LABOR FORCE
We have already seen estimates for US GDP for 2Q, and the reality is the economy suffered a sudden stoppage. This will produce some completely incomprehensible economic data. Jobless claims next week are likely to soar to 1mm-3mm or worse, which far exceeds those seen during 2008 and way above the 200k seen for most of 2019-2020. This is not a distortion, social distancing and fear have caused many service businesses to see a sudden stop.
Think about that for a moment, if service businesses see a sudden drop in customer interactions and traffic, they will naturally cut back. These businesses operate on low margins and labor is a high variable cost. In the past, we wrote about how some of these companies have a market cap of $79,000 per employee. Clearly, highly labor-intensive companies.
–Taking a look at the BLS report, there are 26 million people working in these service sector industries.
–If there is a 5% layoff rate, this would result in 1.3 million job losses.
Realize, this is the “one-time” response to the sudden stoppage and presumably, in a return to normal, many of these jobs are recovered.
POINT #2: FOCUS ON ITALY NEW HOSPITALIZATIONS AND SWAB RATES
Our clients seem to be focused on Italy as the template for the risks to the US. And as shown below, for the most part, the US is following Italy with a two-week lag. Granted, the mortality rates are significantly low. For instance, the state of NY has the highest number of cases (per Johns Hopkins) but the total number of reported deaths is 34 vs 233 for Italy with the same case count.
But the fact is that investors seem to be using Italy as the template and if such is the case, the “peak” in new cases for Italy will be an important benchmark. After all, if cases reach a “peak” in Italy, then the local models for the US would simply follow by two weeks.
Italy’s case count is still rising and has not peaked…
The bad news is that the case count for Italy is still rising. As of the latest update, the number of new cases is 4,670. This means the US is at least 2 weeks away from a local peak (assuming Italy is 2 weeks ahead). Of course, there are differences between the US and Italy. Among them:
– time of social distancing initiatives
– age of the population (Italy older)
– social structure (number of family members per household, etc).
– The US is late to testing, so the number of cases is rising quickly, but likely reflecting the fact that testing is so far behind.
% of Swabs that are positive is steady at around 19%-25%
The number of swabs conducted is up sharply for Italy at 24,109 for the latest day (see below). And the % of swabs that are positive have held steady at between 20%-24% of the swabs. This is good, in the sense, that about 3 of 4 cases of people thinking they have corona or symptoms of corona are in fact, not infected.
Did New admittances to hospitals peak on March 18th, 2020?
The concern many investors have about Coronavirus, is not necessarily the death rate (which is rising in Italy) but the hospitalization rate. Because this is what could overwhelm the US healthcare system. About 49% of all positive cases for Corona are hospitalized, which is double the rate estimated by the WHO broadly. And about 7% of cases are in “intensive care” which is what risks crashing the system since that is what would lead to soaring mortality. Italy data shows:
| ricoverati_con_sintomi | Hospitalized with symptoms | |
| terapia_intensiva | Intensive | |
| totale_ospedalizzati | Hospitalized | |
| isolamento_domiciliare | Home | |
| totale_attualmente_positivi | Currently Positive | |
| nuovi_attualmente_positivi | New Currently Positive | |
| dimessi_guariti | Discharged | |
| deceduti | Dead | |
| totale_casi | Total Cases | |
| tamponi | Swabs |
We can, therefore, calculate hospital “admissions” as follows:
Net daily change in hospitalized
+ net daily discharged
+ net daily deaths
= “hospital admissions”
This is a gross calculation and is just our best estimate. We have plotted this chart below as shown below, the steady rise in “new admissions” to the hospitals appeared to have peaked on March 18th, 2020 at 3,225. And in the past 2 days, this figure is actually down sharply to 1,726. This could mean a few things, however:
– Italy has run out of hospital capacity, so people are now being turned away (possible)
– Treatment guidelines might be changing, so more people are asked to stay at home (possible)
– New cases requiring hospitalization could be peaking (maybe)
We don’t know the answer but we wanted to provide some context to the Italy headline situation. Because Italy is closely watched, and signs of a peak are what matters most, we think looking at the data comprehensively is worthwhile. Italy has commented they expect their peak in the crisis to be within the next 2 weeks.
POINT #3: TERRIBLE WEAK FOR MARKETS BUT SIGNS OF INTERNAL BOTTOMING
This was the worst week for stocks since 2008 with a decline of 15%. The stock market crashed 12% on Monday and never fully recovered. But something unique in this sell-off has been the shift in sector movements.
– On Monday, during the 12% crash, leading the declines were Cyclicals like Discretionary, FANG, Tech, Energy, etc. And Defensives, naturally outperformed. This pattern continued on Tuesday as well (Defensive led)
– But Thursday and Friday (3/19 and 3/20), Staples and Utilities, the bedrock Defensive trade, underperformed.
Is this a sign of selling exhaustion? Maybe.
Our global Portfolio Strategist, Brian Rauscher, noted that his HALO model is suggesting a potential tactical bottom is underway (shorter-term) but the key is the S&P 500 would need to close above its 3/18 low of 2,282.
The VIX also managed to decline today. So despite the 4% drop and sell-off into the close (triple witching?), there was a diminished, albeit, still high level of fear.
