COVID-19 UPDATE. White House believes US past "apex", so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary

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.


Of all the important milestones in the past week, we believe the most significant from an equity market (which also drives the economy) is the S&P 500 closing above 2,793 (~2,800) as it represents a full 50% retracement of the decline and solidifies two things: (i) the bottom is in and (ii) we are in a bull market recovery, as bizarre as it sounds.  But you probably noticed that the market has shifted into the hands of “buyers” whereas sellers were in complete control from 2/19/2020 to 3/23/2020.

And if we are to decipher the message of the equity market rally, it is likely telling us that conventional thinking about the path forward in COVID-19 is simply too pessimistic.  This makes sense to me, and if I could highlight some points:

– The US reached peak cases likely on 4/10/2020, which is well ahead of White House guidance and Pres. Trump even observed this today;
– As bad as the US economic data has been (retail sales + Empire + IP), I am surprised capacity utilization is still 73% (very high);
– Bad news = OW Consumer Discretionary (the heart of epicenter) (see below)

Is the stock market telling us the economy may re-start sooner? and with a faster ramp?  Recall, BofA Merrill survey showed fund managers predominantly see a U- or W-shaped economic recovery.

In this commentary, we look at how quickly other nations moved from “peak cases” to “75% off from the peak (way down the curve) and it turns out it takes about 2 weeks (70% of the 32 nations/regions).  That is pretty quick (see below).

If we move this quickly to a collapse in cases, and it means NY-state really, this is a positive outcome.


POINT #1: White House suggested today the US is past peak cases, now shifting focus on regions where “mitigation” needed
Today, at the White House briefing, the administration expressed the belief the US is past the “apex” in the number of new COVID-19 cases.  If this is the case, April 10, 2020 marked the peak at 34,617.  VP Pence and Dr. Birx also noted that efforts are to delineate the US between regions with COVID-19 outbreaks and areas where less “mitigation” is required.  And Pence pointed out 24% of counties (based on people) have zero cases.  

Overall, today showed the US is making progress in the right direction.  In numbers, the US reported 30,183 net new COVID-19 cases, but this is principally due to an unexplained surge in NY state (+11,571, which is an ALL-TIME HIGH, and contrast with Gov Cuomo statements today).

– US, ex-NY, reported 18,612 net new cases, which continues the general path that 4/10/2020 was the peak in new cases.

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
Source: Fundstrat, COVID-19 Tracking Project



During the White House briefing today, the media expressed skepticism that the US is past peak cases.  Dr. Birx referred to the county-level as affirming this.  And as many of you are aware, Fundstrat has looked at county-level data for the past few weeks and is coming to largely the same conclusion.


NY state had a bizarre surge today in new cases… contrasting with the steady drop in hospitalizations (later stage signal).
Today, based on data provided by Johns Hopkins (which we find way more reliable than NYC.gov, unfortunately) shows NY state reported 11,571 cases.  This is a major surge. It is 61% higher than what was reported on the day prior and ~1,000 above any previous high watermark for new cases.

– Gov. Cuomo did not even reference this in today’s briefing and he cited numerous statistics that continued his narrative that NY state is past the apex.

 

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
Source: Fundstrat, NY.Gov


Looking at the county-level data, the ~4,000 increase in daily cases is entirely NYC.  Did NYC see a sudden outbreak?  We are not clear and as we have noted, NYC itself is posting updates now with almost a 2-day lag.  We wonder if NYC is simply “true-up” data and the data quality overall from NYC is possibly not great.

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
Source: Fundstrat, Johns Hopkins CSSE




NY State hospitalizations now 2 consecutive days of “net discharges” 
NY state net hospitalizations (admissions less discharges) turned negative for the second consecutive day.  This means the NY healthcare system, while “maxed out” is able to reduce the resources allocated for COVID-19. 

– NY state is sending 100 ventilators to Michigan and 50 to Maryland.  So this is probably more consistent with the notion that NY state has passed the apex in its cases.

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary



As we noted recently, the state governors are beginning to talk about re-opening the economy.  Yesterday, CA Governor Gavin Newsom outlined 6 criteria — of which, we felt it was overly stringent.  Today, NY Governor Cuomo provided some further insights into his administration’s process.  This is outlined below (slide from press conference).

– NY/multi-state coalition thinks about 2 vectors of criteria: first, is essential vs non-essential and second, low vs high infection risk. 

– the high priority is “essential” and “low infection” risk industries. 

This is really a logical concept.  And of course, many industries will lobby that they fall into that “best” vector.

Additionally, Cuomo announced an executive order to wear a mask where social distance is not possible.  This is common sense and no doubt, all Americans will soon be wearing some type of face-covering in the coming months.  The supreme version will be a digitally rendered face (just kidding).

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary





POINT #2: Now that the US has peaked, how long for daily cases to fall 75% from the peak?  Based on 32 nations, by 4/25/2020 (+14 days)
Michael Cembalest, CIO of JPM Private Bank, raised an interesting question recently. He asked how quickly will the US case count decline?

We looked at the 32 nations/regions (using John’s Hopkins data) which have passed the “apex” and have seen a 75% decline in cases (3-day mavg) versus the peak.  The 75% number is arbitrary, but our belief is that a 75% drop in the case is way past mitigation and closer to the eradication of COVID-19.

– FAST COLLAPSE: 16 of 32 nations, or half, saw cases fall by 75% within a week;

– 22 of 32 (70% of the nations) saw cases fall by 75% within 2 weeks.

– SLOW FADE OF COVID-19: 10 of 32 nations (30%) were “slow fades” and the longest it took is 24 days or ~3 weeks.


COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
Source: Fundstrat, Johns Hopkins CSSE



US is probably somewhere between the 70%-percentile and SLOW FADE = the date is between 4/25/2020 and 5/4/2020
The natural question is where will the US experience be? Several factors need to be considered:

– outbreaks are local
– each outbreak has its own curve
– NY state is ~40% of the pandemic

We think NY state will see a rapid collapse — already happening except for the data fluke today
The rest of the US is facing its own individual curves.

Thus, we think it will fall into the 14-24 day window.  And as illustrated below, implies the US should see cases drop by 75% sometime between 4/25/2020 and 5/4/2020.
 

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
Source: Fundstrat, Covid-19 Tracking Project



POINT #3: How much progress has the US towards a 75% fall in cases –> Leading Indicator: Counties with cases 75% off from the peak
Logically, COVID-19 outbreaks are regional (transmissions between regions take place) and if so, the “75% fall-off” in cases will take place regionally.  We took the county-level data and aggregated the counties based on “% off from the peak” cases.  

– 18% of the US (based on counties) have 3-day avg daily new cases 75% off the highs. 
– A week ago, it was only 8%, so more than 2X in 7 days.
– 44% of the US (based on counties) have 3-day avg daily new cases 50% off the highs.

Half of the US is way down the curve on cases and 18% is WAY DOWN “past the curve”
These data points are more encouraging. Basically, half of the US is well off the APEX (50% off) and about 1/5 of the US is WAY WAY DOWN.   Overall, this supports the case that we could see the US overall down 75% in cases within the next 14 days.

– If this is the case, we think this will vastly change the dialogue around re-starting the economy.  In other words, this would be another positive surprise.

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary



POINT #4: Peak US deaths 10 days (most 0 to 13 days) from the peak in US cases, based on a composite of 19 nations implying 4/23 as the outside date.
A quick point on US deaths.  These are still rising and today 2,492 deaths were reported.  This is tragic and highlights the seriousness of COVID-19.  But we have to also remember the definition of death due to COVID-19 is not as precisely defined as you might think.  For instance, NYC explains how it attributes death.

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
Source: Fundstrat, NYC.Gov


Based on their definition, someone who died of a COVID-19 like condition (pneumonia, etc) but was not tested, would be labeled a COVID-19 death.  Ultimately, we can only know the true number in the rearview mirror, when clean CDC data is available and we can see how many “additional” deaths took place in the USA. Those likely are COVID-19 related.

Based on 19 nations, the median lag between the peak in cases and peak in deaths is 10 days, with 15 of 19 by +12 days.
Below are the 19 nations and the gap between peak cases and peak deaths.  This table is something we published previously, and our data scientist (tireless Ken) added several additional nations.  The longest gap is Luxembourg where it took 17 days.  But generally, the gap is really somewhere between 7-12 days.

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
Source: Fundstrat, Johns Hopkins CSSE


And plotting the US reported daily COVID-19 deaths, this implies the US will seek peak deaths by 4/23/2020 and the outside date is the end of this month.

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
Source: Fundstrat, COVID19 Tracking Project


STRATEGY: Weak consumer confidence = best time to OW Consumer Discretionary stocks
We previously mentioned there will be 3 waves of bad news in this COVID-19 pandemic.  Our stylized map of this is below:

– Wave 1 is the COVID-19 peak.
– Wave 2 the social distance (restaurants, retail, 30% unemployment, travel-related, etc)  economic hit — the first wave of the economic shutdown.  And earnings will reveal this extent.
– Wave 3 the hit taken by “asset owners”: business owners, landlords, banks, supplies, etc.

And our general framework is that equities will bottom well ahead of wave 3.

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
Source: Fundstrat


Today we got a trifecta of awful economic data. US retail sales down 8.7% (vs -8.0% Street); Empire Manufacturing (NY Fed) -78.2 (vs -35.0); and Industrial Production -5.4% (-4.0 survey).  These are terrible numbers. 

But should they be a surprise?

The US economy is literally stopped due to government mandate, stemming from COVID.  How can these numbers be anything but freakishly bad? 

How is capacity utilization still at 73%?
In fact, I was surprised to see capacity utilization at 72.7% (vs 77% last month).  Think about it. If the supply chain is shut down, shouldn’t there be way more excess capacity?

But I want to come to our view that the “epi-center” stocks are good risk/rewards.  As we said previously, this mirrors the October 2008 playbook, where the hardest hit groups began to show positive absolute performance (in 2002, you had to avoid the epi-center).  But unlike other crises, the epi-center stocks are really victims of the government mandate (and necessary) to social distance.

– below, you can see the 2020 epi-center is Consumer Discretionary + Financials + Industrials.

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
Source: Fundstrat, Bloomberg


Consumer Confidence will collapse in coming months = OW Consumer Discretionary (ironically)
The University of Michigan Consumer Confidence index (mid-month) showed a near-record collapse to 70 from >100 previously.  But given the rising unemployment, further misery and second-order effects, we expect consumer confidence to weaken further.

– since 1979 (40 years), this survey has seen worse readings twice.  
– In the early 80s, during stagflation, this got to a record 50.  It was during this time that President Ronald Reagan (then a governor running against Dem Jimmy Carter) said: “a recession is when your neighbor loses his job, it’s a depression when you lose yours.”
– and during the GFC, it fell to nearly 50.

So it is natural to expect this number to work its way from 70 to 50 in the coming months.  Maybe weeks.`

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
Source: Fundstrat, Bloomberg

 
So how is this good for Consumer Discretionary?
It turns out, the best time to buy Consumer Discretionary stocks is when Consumer Confidence is terrible.

The distribution chart shows 10 deciles of Consumer Confidence and subsequent returns of Consumer Discretionary.

– the bottom 2 declines (confidence 50 to 70) show the strongest forward returns for Discretionary.
– over 12m, the forward returns are 20%-30% with an 88% win-ratio
– these are the single best times to own Consumer Discretionary.


COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary
Source: Fundstrat, Bloomberg


The overall takeaway reinforces the idea we should be buying the epicenter.  And moreover, it shows the “half-full” framework is more useful as we are apexing on the crisis.  In other words, we should be viewing this period as an opportunity, not as a “safety trade”.

To conclude, I include an excerpt from a commentary by Bill Miller, of Miller Value Partners.  This was not sent to me by Bill but was shared with me.  I did not ask Bill for his permission, but I will ask for his forgiveness after the fact.

Basically, Bill said in his long career, there have been 4 big opportunities to invest.  He sees the 2020 COVID-19 crisis as the 5th. (see below)

COVID-19 UPDATE. White House believes US past apex, so how long does it take 30 nations for cases to fall 75%? Weak consumer = OW Consumer Discretionary

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