COVID-19 UPDATE. NY state cases plunge, US seems past apex on cases. Regarding re-start, it is about "wealthy Americans" and thus, epicenter better risk/reward

Once again, 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.

Good chance the US is already “past the apex” in new cases… even ex-NY state, cases lowest since 4/5/2020
We realize that data quality early in the week can be affected by weekend closures, thus Monday data is subject to revision, and thus, we should not draw too many conclusions.  But there appears to be sustained downward move in the US reported daily new cases.

– Total daily new cases is 24,948, the lowest level since 3/31/2020 and ~10,000 below the 34,550 reported a week ago.

– One might suggest this fall-off is solely due to NY state (Cuomo suggested today NY is past peak).  But even US ex-NY (second chart) shows a similar trend.

– Ex-NY, total cases were 18,611, the lowest since 4/5/2020 and ~5,000 below the 24,000 seen a week ago.

The implications, if true, are two-fold:

– first, the US healthcare crisis is tracking above the base case of the White House (cases peaking this week, but appears the peak is behind us) and thus, the utilization of healthcare resources is lower, overall deaths should be lower and fewer American lives and families are shattered.

– second, there will be an even faster focus on the complex task to “restart economy” — fortunately, expectations are extremely low here.  Governors are tentatively referring to Summer 2020, the media remains highly skeptical and thus sees little progress.

Based on my numerous conversations, I would not label our clients are not necessarily skeptical of an economic restart.  Rather, it is vast uncertainty. And I agree.  Never has capitalism been shut-off and then turned back on.  Thus, uncertainty is reasonable.  However, keep in mind, uncertainty in the risk asset world = risk-off = bearishness.   Thus, if someone is uncertain, their investment behavior is the same as someone who is bearish.

A long-winded way of saying, expectations are supremely low because uncertainty is the same as being skeptical.

POINT #1:  Even US daily deaths seem to be falling, ex-NY as well…
The daily reported deaths (per Johns Hopkins) is 1,450, down from 2,064 on 4/10/2020 and seem to be falling after a plateau of 1,900-2,000 for the past week.

– the IHME model had forecasted US deaths to peak this week, either Tuesday or Wednesday, thus, this development, if sustained, means even daily deaths peaked a week ahead of forecast.

– ex-NY state, US deaths were 779, down from 1,287 (high watermark on 4/10/2020) and below the 1,100-1,300 range for the past week.

– 7,700 Americans die every day (2.8mm per year), so this figure is still a shocking 20% of all daily deaths in the USA.  And remains an unacceptably high figure. 

But from a mortality perspective, once this figure drifts to 300-400 level, one could see COVID-19 as having receded from the headlines

In terms of tracking case growth, previously, we viewed NY state peaking as a framework for modeling the rest of the country.  But because NY state is peaking nearly simultaneously with the rest of the country, the question is slightly different. 

– are any states seeing such case growth that could lead to a new surge? 
– the top 25 states (based on daily cases reported) are shown below and 7 are seeing recently higher daily cases.  Of these 7, none is a surprise outbreak.  Rather, the trouble spots like NJ, MA, PA seem to be flattening.  Even Detroit (see below) within Michigan.

POINT #2: Taking a look at how Americans are doing “social distance” — by income and by region
Deep Macro, headed by Jeff Young (an alumnus of Long Term Capital and of Salomon Brothers), a very specialized macro research firm using big data in its work, has produced some interesting data on how the US is doing its “social distance.”  Deep Macro uses anonymous cell phone data to track how Americans are moving around.

Most residents are complying with social distance (measured as % that stay at home)…Their data for 5 major cities is below.  The chart shows the change (in percentage terms) of how many residents are staying at home vs March 1, 2020:

– the biggest takeaway, is 60% of residents in these 5 cities are staying at home.  NYC has the highest share (~60%) and New Orleans, Seattle lowest (~40%)

– the compliance (% stay at home) does not really correlate to the extent of the outbreak. 

– New Yorkers largely started complying ina big way before other cities, and despite this, had the worst outcome for any city, by a country mile.

– This further adds to the “puzzle” in our view–population density, compliance with social distance, etc. do not seem to explain why NYC became ground zero.  

Re-starting the economy is more dependent on the behavior of higher income households…
Deep Macro also looks at this data based on income tiers (since this is anonymous data, it is not clear how this is derived, unless it is based on zip code of the residence).  As shown below, there is a big variance in “stay at home” based on income tier.

– about 30% of lower-income households (<$25k) are “stay at home” and this figure has been constant since mid-March.

– but 80% of higher-income households (>$100k) are “stay at home” compliant.  This figure has been pinned at 80% since March 22.

A big element of the “restart” of the economy is about getting people out of their homes and actually practicing safe social distance while engaging in the economy.  The biggest wallet and the biggest cohort staying at home are those with incomes >$100k.  By the way, these same households own a lot of financial assets as well.

Thus, the simplistic observation is what are conditions that will coax these households to feel confident to become consumers again?  The obvious answers are: 

– US COVID-19 crisis diminishing, thus reducing fear;
– establishing proven processes and rules, with accountability, to allow people to confidently leave their homes–this could be “masks,” gloves, etc;
– preventative measures such as widespread testing to provide greater confidence about detection;
– more of this economy become “mobile” via home delivery or  “web-based”
– a cure;
– a vaccine;
– COVID-19 simply vanishes;

We don’t have answers, but this data is useful, because it does, in a sense, narrow the restart question, to the question of higher-income households.

POINT #3: County-wide data supports US case growth slowing, but COVID still surging in Rockland and Westchester (both NY)…

Since COVID-19 outbreaks are local, looking at county-level data better captures the outbreaks.  Overall, the majority of counties are seeing daily case growth <10%.  On the distribution chart below, these are the “green” (best <5%) and “grey” (>5% <10%) lines.  And the “pink” line is collapsing (>10% <20%).  If COVID-19 is slowing, we would expect to see the green+grey line to rise and it is currently 59%.

Looking at the 35 biggest counties in the US (~27% of US population, 87 million residents), daily case growth averages ~4%, which is the same as the US overall.  In fact, there is only 1 county where daily case growth is >10%. 

– Tarrant Country, TX (the largest city is Fort Worth) has a case growth of 11%.  But we should be aware of the base effect here. 
– Tarrant has 417 cases per 1 million, 1/5 the level of the US overall and the second-lowest of the 35 (San Bernadino is lower).  And way below the 12,806 of NY county (#2 in size).

POINT #4: What about the risk of a second wave?  Recall, Sweden, Belarus, Singapore and Taiwan have not imposed strict stay-at-home measures, and COVID-19 has not been prevalent… that strongly argues against a second wave…

There is quite a bit of talk about the US having a second wave of COVID-19 in the Fall/Winter.  If such is the case, the US will experience a second economic ripple and such a start/stop would be obviously disruptive. And if this was to happen, the US needs to prepare a plan to deal with local outbreaks or alternately, a vaccine becomes key.

But is a second wave inevitable?

If COVID-19 re-appears in the USA, the US is better prepared and that second wave curve will look like Asia…
We don’t have the answer.  But consider the experience of Asian nations below.  We have listed Singapore, South Korea, Hong Kong, Taiwan, Vietnam, and Japan.

And we rebased all of these to day 0 = 100 cases.  Foremost, these countries vastly outperformed the USA in their experience.  

– Only South Korea implemented any strict social distance measures.  The other nations had tools to deal with the outbreak, having experienced SARS.

The point of this is “shutting down the economy” is not the only way to deal with COVID-19.  The US is far more prepared now and by Fall, will have widespread testing, including antibody testing.  Thus, if COVID reappears, we think the Asia outcome is more appropriate.

– no need to shut down the economy and yet, the virus can be hopefully contained. 

Even countries with limited or no social distance measures outperformed the US…
Similarly, several European nations have limited or no social distance measures in place with Sweden, Belarus and Russia shown below.  Belarus has zero restrictions in place but some of you may discredit their data because they could be under-reporting.

– if we focus on Sweden solely, notice how their cases per 1mm residents is significantly lower than the US overall?

– this again, suggest the US would not need to pursue a full economic shutdown if cases re-appear.

The takeaway? We think once the US re-starts the economy, we think the need to “shut it down” again is not necessary.  Asia nations did not have to do this.  And in Europe, countries have dealt with COVID-19 with less strict measures.  And more importantly, the US will have tools in a few months to further limit the spread of COVID, if it does reappear.

STRATEGY: There is still a rationale for investing in the epi-center, even as we remain “uncertain” about the economic restart

Over the coming weeks, the focus will shift towards economic restart.  This largely rests in the hands of policymakers, both the White House and state/local governors.  We don’t think a single metric determines how this start will take place and in the coming days, we will examine various approaches.  But earning season will not tell us much.  It will tell us how much economic activity has slowed.

But we don’t think balance sheets are the only metric to focus on.  We think the key will be assessing how quickly a company can recover its cadence once the economy restarts.  For most “social distance” victims, this should be pretty fast.  After all, if a business has a legal entity, operating agreements, PP&E and a customer database, then the restart is largely a function of re-hiring + traffic.  

Our preferred framework is to use October 2008 from GFC as the “playbook” for sector selection.  This is a good middle ground for those who believe “the worst is still ahead” but it is also suitable for those who believe “markets already bottomed on bad news.”  October 2008 was the date that stocks began to rise, even as the S&P 500 had another 20% further decline.  

In October 2008, one had to buy the “epi-center” of the crisis–the stocks worst hit, as those outperformed into March 2009.  By the way, the stocks that worked Oct 2008 to March 2009 were the same ones that led March 2009 to YE 2009. So picking October 2008 is a good compromise.

Below are the top 40 GICS groups since 3/23/2020.  We sorted by absolute performance but also show YTD performance as well.  The groups shaded in “red” are the epi-center groups.  Stocks at the center of this crisis.

We favor buying the “epicenter” in 2020.  After all, these companies did not cause COVID-19 and will hardly be viewed as the villains when the dust is settled.  Moreover, there is considerable policy support to backstop these businesses and their customers.  And this was even confirmed by Fed Chair Powell in his remarks on 4/9 at the Brookings Institute.  Note, he refers to the sacrifices made for the common good and the “need to make them whole”

We wish everyone safety and health during this extraordinarily uncertain time.