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.
It has been a rough start with the S&P 500 down 5% in the first two trading days. Given the 28% rise in stocks in the past 3 weeks, a pullback is hardly surprising. The collapse in oil, along with weak earnings, is also raising the possibility that “the bear market rally” is done and now stocks will fall as the “real bad news hits.”
Our Head of Technical Strategy, Rob Sluymer, believes a “correction” is underway as equities simply need to “work off” this significantly overbought condition resulting from this vertical rally. A typical correction would take us towards 2,600 (~200-week DMA) or 100 points down from here.
We realize that many “uncertain” investors (uncertain is the same as bearish from a positioning perspective) will become negative. But we believe the S&P 500 will likely have a shallow pullback and not make a new low. One of the things we highlight at the end of this note is the impressive rebound in high-yield (recovery vs highs, and inflows and even issuance). And if high-yield remains relatively resilient, even in the face of a meltdown in crude, this is supportive of a shallower pullback in stocks.
The focus of policymakers is now increasingly on the conditions, sequence, speed of restarting the economy. Overseas, the Netherlands, Italy and even France, are now talking about a re-start of their economies in May (see below). Recall, many view Italy as being “two weeks” ahead of the US (during the case surge) and thus, much of Europe has moved its focus to a re-opening of their economies.
This afternoon (Tuesday), Congress agreed to Phase 4 legislation with new money for PPP and SBA, another example of the extreme speed with which Congress and the White House have moved in this crisis. Per Tom Block, Fundstrat’s Policy Strategist (and former head of JPMorgan Govt relations for 25 years):
“The bill has $310 billion of new money for the Payroll Protection Plan, and $60 billion for SBA disaster loans that don’t have some of the restrictions that the PPP program has created in order to turn the loan into a grant. Agriculture will be defined as a small business, and some of the money will be earmarked for banks with less than $50 billion in assets. $75 billion is added to the $100 billion in the original CARES Act for hospitals and $25 billion is included for testing ranging from grants to states and CDC and NIH for research and development. Congress is likely to come back on May 5 and at that time they will consider additional coronavirus related legislation including aid to state and local governments. At some point as businesses open and people start to go back to work Congress is likely to move from crisis relief to economic stimulus. I would expect a significant stimulus bill as early as June.”
POINT #1: NY state cases trend lower, and US cases down, but CA sees surge (could be methodology)
Governor Cuomo, in his live press briefing today, spoke about the fact the restart for the state would likely be regional because as he pointed out, outside of NYC metro area, the rest of the state has fared pretty well. NYC metro is ~50% of the state’s population. But NY state continues to see steady progress and daily new cases reported is 4,178, the 7th consecutive decline in daily new cases. And now cases are 61% below the peak of 10,841 from 4/4/2020 or 17 days since the peak.
Cuomo spoke about the target of doubling testing to 40,000 per day from 20,000 and in a last-minute evening press briefing, noted that the White House and state governors have worked out a framework for the US to steeply ramp up testing capabilities. Testing looks like it will be a key precursor for NY state to move forward, and he cautioned it took 5 weeks to go from 10,000 tests to 20,000. So NY state could be one of the last to re-open
The daily cases reported by state continue to be a positive trend. Of the top 30 states, only Massachusetts and California reported what look like a significant rise in daily cases. Our data scientist, tireless Ken, has noted that MA does not always provide timely daily updates to COVID-19 cases, resulting in an occasional surge.
For California, there appears to be just normal lumpiness to the data. Per Gov Gavin Newsom, “As you’ve seen, the [ICU] number has been bouncing around one percent to 2 percent — we’ve declined a few days here and there. It’s certainly stabilizing. But yesterday we saw an increase of 3.8%.”
And overall cases in the US remain lower than the most recent peak of 34,550 from 4/10/2020 (-24% from peak and 11 days now). The decision to restart the economy rests with the state and local governments, so looking at US overall cases provides a useful aggregate, but does not necessarily inform us how the US moves forward.
POINT #2: About 24% of the US (based on county-level population) have seen daily cases down 75% from peak…
There are many ways to look at the county-level data, and below, we present what % of the US population (based on county-level population) has seen daily cases down 75% from their peak.
– the most recent update shows this at 24%, or roughly one-quarter of the US has seen a collapse in new daily COVID-19 cases.
– this line is growing daily and in just the past day, increased from 22% to 24%. Given NYC metro area is not in this total (it is down 61% from peak), we expect this figure to surge in the next 5-10 days.
Which states are further along in diminishing cases? (county-level “diffusion”) Topping the list are Wyoming and Idaho…
We sorted the US states, based on what % of the population (using county-level data) has seen a 75% drop off in cases.
– Wyoming tops this list with 92% of counties seeing a 92% drop in cases, and close behind is Idaho (-88%).
– In total, there are 12 states with this figure >50% (see green highlight).
– North Carolina is the largest GDP contributor of these 12 states (at 2.8% of US GDP).
– 50% of Montana has reported zero cases in the past 7 days and 22% of the state zero in the past 14 days.
This table is one way to track the individual progress of states in reducing the case growth of COVID-19 and therefore highlights states which are in a better position to re-open their economies.
Of the top 8 states (share of GDP), Texas is the highest at #22, with 30% of its state seeing a 75% drop in cases…
Of the top 8 states (50% of US GDP), Texas is the furthest along. Texas was not as hard hit as NY, NJ, MI, PA or even CA and its 697 cases per 1mm residents is about 1/20th of NY state.
– so the fact that 30% of state is down 75% in cases means Texas is way further along in eradicating the spread of COVID-19.
POINT #3: Singapore, rise in cases is not a “second wave” but a surge stemming from foreign workers living in dorms.
I had a conversation with Steve Auth, CIO of Federated, and he asked whether we viewed the recent surge in Singapore as a warning about the dangers of a “second wave” of cases. At the time, I could not provide a simple answer. The Ministry of Health Singapore provides really detailed data on COVID-19 cases, including profiles of specific cases. Our data science team put together some analytics.
Singapore is not having a second wave, but it is a continuation as cases moved from “imported” to residents and work-permit visitors…
And from a high level, we do not look like it is having a “second wave” of cases.
We are defining “the second wave” as a resurgence of cases in a population because of a relaxing of rules around the social distance.
There are basically 4 broad categories for case classifications in Singapore:
– imported cases (from either China or returning students from other infected nations)
– residents
– work permit visitors, not in dorms
– work permit visitors, living in dorms
The chart below maps the daily reported cases for these 4 categories. And as apparent by the parabolic surge, the rise in cases is essentially solely due to the latter category. Work permit visitors living in dorms.
The rise in cases is a sequence from “imported cases” to simultaneous rise in cases among residents + work permit holders…
How can we tell this is not a second wave?
Take a look at the “zoomed” chart below. We cut off the Y-axis so we could see the case counts for the 4 categories. And the sequence is apparent from this chart:
– “imported cases” accounted for the bulk of cases until late March (see red line)
– from that date, we saw simultaneous rises in residents (dark blue), work permit not in dorms (light blue) and work permit dorms (blue).
– in other words, this is not a second wave, but just a “transmission” across the population.
Singapore Work Permit Dorms house ~250,0000 to ~300,000 people across 43 dormitories
I am not too familiar with Singapore dormitories but the Ministry of Manpower cites 43 dormitories, with these workers coming from many nations such as Bangladesh, India, and these workers tend to be employed in low wage industries like construction, shipping, and cleaning. These dorms apparently have many people living in a room, as much as 10-15 and thus, there are little social distance abilities in these quarters.
– so it is not a surprise there is an outbreak in the dorms.
And looking at the daily case counts for Singapore outside of the dorms, one can see there is no real surge in cases. Daily case count has been flat for the past 8 weeks.
Final note, massive testing and Singapore cumulative death rate is 0.1% and 11 total deaths on >9,000 cases…
Singapore conducts extensive testing. The latest figure shows about 96,000 tests are conducted per day and of these, about 1% is positive. In the US, the positive rate is 33% or so, so on a proportionate basis, one could think that the US needs to increase its daily testing by 20X-30X to match the pervasiveness of Singapore. The US is about 130,000 per day, so this figure would need to rise to 3 million or so.
But the other curiosity is the low mortality rate in Singapore. Since the outbreak of COVID-19, Singapore has registered 11 deaths, from 9,200 cases. This a case fatality rate (CFR) of 0.10%
Pretty incredible
Total Deaths 11
Total Cases 9,215
Calculated CFR 0.10%
(case fatality rate)
POINT #4: Italy, Netherlands and France (more tentative) announce the date for the re-opening economy…
In the meantime, Europe is making rapid progress toward opening the economy. As the updated table below shows, 6 Western European nations have announced plans to re-open the economy.
– Italy announced it will soon have details but it is likely May 4th. The Netherlands suggested 5/11.
– France did also put forth some details, but since the dates were relatively vague, we did not include France.
– The days since peak have been >14 days but the Netherlands is the exception with 10 days and the decline since the peak is >50% (except the Netherlands).
This is overall encouraging as this is >$8T of GDP (USD terms) and is >50% of Europe’s GDP.
STRATEGY: S&P 500 is taking a needed breather, but high-yield
One of the tenets of our strategic framework is the view that equities are the “junior piece” of the capital structure. Thus, high-yield and credit generally lead stocks. This is not necessarily a popular view, but it does remind us that stocks and credit should be largely telling the same story.
High-yield (proxy –> HYG) recovered 76% of its losses, suggesting S&P 500 has to “catch-up” ~3,100 level
Because of our framework, we tend to look at high-yield so gauge whether those markets are confirming the move/trend in stocks. A simple proxy for HY is the ETF HYG. HYG has become a sizable share of managed HY assets, so it is a good market proxy (although it does not own the lower-rated segments of HY).
– HYG fell 24% from its Feb highs to the March lows, about 72% of the S&P 500 decline. That makes sense as HY has 80% of the return of equity with half of the volatility (ever wonder why HY is such a good total return investment? it is this statistic).
– But HYG staged an even stronger recovery, recovering 76% of the losses compared to only 50% for the S&P 500.
We view this as a positive divergence. We think the move in HYG is suggesting the S&P 500 can move to 3,110 or so, based on HYG gains.
S&P 500 has not “overshot” and we see limited risk of a new low…
In other words, we think the S&P 500 has not “overshot” in its move to 2,800.
And this is another support for our base case that stocks bottomed on 3/23/2020. In past comments, we noted multiple market structure factors such as (# consecutive 90% down days, Thomas DeMark “13 count” for the market, V-bottoms) but also fundamentals (stocks typically bottom ahead of the economy, usually 2-4 ahead of “peak jobless claims”, and also fact that employment losses > income losses).
High-yield fundamentals are also improving. For instance, below is an abstract from JPMorgan’s Fixed Income team, noting big inflows into HY last week. A record of $7.66 billion.
If HY has 11% upside into YE, stocks have 15%-plus upside
And JPMorgan’s HY team sees 11% total return for HY into year-end.
If they see an 11% upside, then the S&P 500 has 15%-plus upsides, given the S&P 500 moves $3 for every $2 move in HY.
