COVID-19 UPDATE. NYC "new cases" FLAT 5 consecutive days. FACT, Markets bottom before jobless claims peak.

**We are hosting a webinar/conference call on Friday 4/3 at 1pm ET to discuss to position for post-crisis strategy and ideas.  Details are at the bottom of this email.


The next few days will bring into focus the economic carnage (secondary front) of the COVID-19 pandemic—Thursday, jobless claims; Friday, employment report; next week, earnings season.

Many of our clients are talking about initial jobless claims surging to 9 million, up from a freakish 3.3 million last week.  And we think the intense selling we saw on Wednesday (-5% S&P 500) is in part, tactical investors getting short in front of the jobless report.

POINT #1: A very inconvenient fact–stocks bottom before jobless claims peak…
Jobless claims at 9 million are astounding because this represents about 6% of the employed workforce (152 million) and in just the last two weeks, 8% of the US workforce is now filing unemployment claims.  Because of the sudden stop of the economy, this figure could double again to 16% (another 12 million claims).

– But this sudden stoppage of the economy is also suggesting that we could see a peak in jobless claims within the next few weeks, and possibly the 9 million could be the high watermark.

If jobless claims are peaking soon, why does this matter?
Take a look at the charts below, which show the S&P 500 during the 2001-2003 and 2007-2009 bear market and a corresponding chart shows initial jobless claims and the unemployment rate.

– Stocks historically bottom 2-4 weeks BEFORE jobless claims peak.

– In 2003, the S&P 500 bottomed on 3/11/2003 and initial jobless claims peaked on 4/18/2003.  And payrolls were still negative through July 4, 2003.  Stocks bottomed 4 weeks before claims peaked

– In 2009, the S&P 500 bottomed on 3/9/2009 and initial jobless claims peaked on 3/27/2009.  Stocks bottomed 2 weeks before claims peaked.  And payrolls did not turn positive until November 16, 2009.

I know this sounds counterintuitive.  

Shouldn’t stocks bottom when the economy is actually growing again? 

The best proxy is payrolls (aka unemployment rate). But we believe this reflects the fact that stocks respond to the “delta” in trajectory.  Jobless claims lead to employment.  Thus, when jobless claims peak.  It is only a matter of time before the economy starts growing again.


Strangely, this suggests that if jobless claims of 9 million represents the potential “high water mark,” the S&P 500 may have already bottomed.
We realize we are not experiencing a business cycle.  We are actually facing a global economic shutdown, mandated by governments to deal with a pandemic.  So the business cycle rules are not in place.  Meaning, it could be that jobless claims are not what matters.  Maybe it will be some other derivative measure.

But we will say, conclusively, stocks will bottom well before the economy bottoms.  And well before employment recovers.  We just cannot guarantee that jobless claims is the metric.

But this is food for thought though.  After all, the lows of 3/23/2020 were significant from a market internal damage and level of selling intensity.  And as we have highlighted multiple times, there is an odd symmetry to market recoveries.  The speed of the decline determines the speed of the recovery.



POINT #2: New York City and New York State are showing linear case growth, which is “less bad” and arguably good news.
 
Below shows the cases for NYC and as shown, this figure has been flat for the last 5 days and arguably flat for the last 10 days ranging from 2,700 to 4,000 new cases per day. 

– Given the base of 45,707 cases, the daily increase has slowed to 8.6%, or a doubling rate of every 8 days.  Just last week, case growth was leading to a doubling every 5 days.  

– So you can see, the shift to linear gains (daily case growth constant) also suggests that NYC could be closer to a peak than expected.

And Manhattan is showing this same flat as a pancake case growth. It has been remarkably flat at 480-ish for the last 3 days.

Governor Cuomo today talked about the fact this crisis will likely extend into July, based on hospitalizations and ICU requirements.  And that could in fact be the case.  But all of the epidemiological models were based on case counts rising nearly exponentially for at least the next 7-14 days.  If case growth is flat, it does suggest that the realized outcomes could be better than the base case used by New York State.



POINT #3: NY slowing to 9% CAGR, or 2X every 7.5 days, better than last week’s 2X 3-4 days.  5 other states soaring…
The key GDP states are essentially –> NY, CA, TX and MA.  Others matter, but just keep this in mind…

We have sorted the 50 states based on absolute case growth (simple metric, we realize) but highlight the % of state of total US population for comparison.

– the states which are seeing big surges are NJ and Michigan, with disproportionate share of new cases that are sizable. Close behind is Louisiana and to a much lesser extent is Massachusettes.

– But NY remains the most important state.  Foremost, because the first exponential eruption was NYC (40% of total US cases).  And because of the outsize GDP share of NY state.  In fact, NY + CA + MA + Texas is pretty much the lion’s share of US GDP.

– CA is linear (hopefully does not revert to exponential), MA is worsening but has strict measures in place.

– Texas just saw a doubling of new cases to 731 compared to 389 the prior day.  So it bears watching.

But if NY has turned, we believe markets will have a template to model the US healthcare peak.

CONFERENCE CALL DETAILS:
COVID-19: Investment Strategies as focus moves from a Healthcare crisis to the Economic cycle

Please join us for a conference call on Friday, April 3rd at 1:00 pm ET as we discuss investment strategies as the COVID-19 crisis shifts from a healthcare crisis to the economic cycle.

• The COVID-19 crisis is unfolding in the US along two concurrent paths, the first is the Healthcare crisis and the second is the massive economic ripples. 
• The leading edge metric for the Healthcare crisis is “daily new case count” as this leads hospitalizations, which leads mortality.  And other countries such as China, South Korea, Japan and Italy have marked turning points.
• Even the most pessimistic models see new case counts peaking in the US within the next 7-10 days.
• The second path investors are focusing on is the economic carnage and the leading edge there is jobless claims.  Policy stimulus will have a major impact on this path.

What we will discuss:
• Potential scenarios for this cycle and similarities to 2008 and prior cycles
• What are the structural and permanent changes in the economy?
• How to identify winners and losers

Speakers from FS Insight’s macro strategy team include:
– Thomas Lee, Head of Research
– Tom Block, Head of Policy Strategy
– Brian Rauscher, Global Head of Portfolio Strategy
– Rob Sluymer, Head of Technical Research
– Q&A

Details and Specifics
Date: FRIDAY, April 3, 2020
Time: 1:00 pm Eastern Time
Duration: 45-60 minutes (including live Q&A)

Click below to register
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