COVID-19 UPDATE: NYC breakthrough as new cases 1,613, 78% below peak. Could we now be in the "decline phase" of COVID? Consumer confidence shockingly high = Good. OW Discretionary stocks.

Heads up: We are hosting a conference on Friday to discuss Strategy post “re-start” with our entire team.  Details forthcoming.

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.

Today marks a milestone for COVID-19.

We may now be officially in the “decline” phase of the Healthcare crisis.  That is, we have seen COVID-19 move from exponential –> linear (flattening) –> decline (falling cases).  Why we think we are in the decline phase?  Two things happened in the past 24 hours (hopefully it is not transitory):

– first, NYC reported a breakthrough in COVID-19 case count at 1,613, the first sub-2K day in more than 30 days and now 78% off peak (recall our 75% benchmark, which we acknowledge is arbitrary).

– second, for the first time, >50% of the US counties (based on population) have cases 50% or more off peak (31% with 75% off peak).  This means, half of the US is further in the “decline phase.”

The fact we are in the decline on the healthcare side does not really mean this tragedy is over.  Hardly.  Healthcare workers and hospitals are still dealing with a major medical crisis, all the while dealing with massive cash flow shortfalls due to the drop in profitable elective surgeries and other treatments. And we still have to deal with the two waves of economic suffering, but the healthcare abating means it is appropriate for states to begin re-opening their economies.

But today’s milestone is building upon quite a number of positive milestones over the past few weeks: 
– No new major metropolitan outbreaks
– the rise in new hospitalizations/ICU peaked
– COVID-19 deaths ~65k (likely peak) are coming in below original forecast and the revised optimistic case of 100k
– Advances and array of treatments is rising and improving
– US jobless claims likely peaked
– US credit markets fully functioning
– 18 states are re-opening their economies
– And with today’s data, it looks like NYC/NY state is decisively past the apex

Collectively, this explains why equity markets have shifted into the hands of buyers.  There are also few sellers left.  And as we discuss in this note, we think today’s crash in consumer confidence is positive for Consumer Discretionary stocks.  Since 1971, the best time to own Consumer Discretionary is at the bottom of the consumer confidence cycle.  At the bottom.  Not top.



POINT #1: BREAKTHROUGH IN NYC: 1,613 daily cases finally fall 78% from peak and first sub-2,000 day since mid-March… 17 days post-APEXNew York City looks like it finally is decisively over the apex.   

Daily new cases fell to 1,613 which is the first sub-2k day since 3/24/2020 and is also 78% below the peak.  We have used the 75% threshold as a measure of decisive improvement in case count, although that figure is arbitrary, but we view as far enough away from the high to matter.  This is quite a breakthrough.  NYC has seen cases hover around 4,000 for nearly 30 days — and given the high likely prevalence (based on serological studies), we wondered if NYC would continue to smolder through the summer.

Daily new cases has become less dependable in recent weeks, because of the rapid expansion in testing — in fact, testing nationwide has roughly doubled in the past 10 days and likely 3X-4X greater in the next 4 weeks.  But still, absolute case count falling for NYC is a positive development. 

So this drop in cases is a big deal, in our view.  We hate to speak too early — but it looks like one could say “NYC is well into the path of recovery.”   And the next step is the re-opening of the NYC economy.

NY State cases down 71% from the peak with 3,110 new cases… best daily case count in more than 30 days
New York State also reached a milestone with total reported falling to the lowest level in a month at 3,110 and now 71% off the highs.  Again, cases are somewhat variable because of the impact of testing expansion.  But in the case of NY state, the drop in cases is also coincident with a drop in “% tests positive” so we can see this as somewhat supportive of an improvement in cases.

Source: NYC Dept of Health

NY State % tests positive at 16% is lowest since 3/18/2020, corroborating the improvement in daily cases
Tests administered in NY state are down to 18,899 in the past day compared to 46,912 4 days ago.  So this explains the drop in reported daily cases.  So “organic” daily cases for NY state are not necessarily down as much.

– But the percent of administered tests returning positive is down to 16% and as shown, this is the lowest recorded value since 3/18/2020.

– In fact, the percent of tests returning a positive value has been steadily falling since 4/15/2020 (13 days and counting) when it peaked at 43%.  

So the drop in % tests positive is also a good sign.  During those past 13 days, the daily tests administered were about the same as the ~19,000 administered in the latest report.

Source: NYC Dept of Health


As for the daily new hospitalizations, NY state daily hospitalizations broke below 1,000 for the first time in 30 days at 748.   The direction of improvement for cases, hospitalizations and even mortality are all showing improvements now.

Source: NYC Dept of Health


Given the potential rapid improvement in NYC, perhaps NYC will also be part of mid-May phased opening…
Gov. Cuomo earlier this week alluded to looking at plans to re-open parts of Upstate and Central NY as early as May 15th.

– given this surprising progress on “official” NYC data, we wonder if the state is also considering opening up parts of NYC in that same timeframe.  

This bears watching and is certainly a positive surprise.  Again, recall how NYC continued to post 4,000 cases per day, flatlined, at the same level for nearly 30 days in a row.



POINT #2: From exponential –> linear –> decline.  County-level data argues the US is now in the “decline” phase.

Based on county-level data, 61% of counties see cases 50% off highs (new high) and 31% are 75% off (new high)…
The metrics for measuring COVID-19 have evolved as the pandemic evolved.  Early in this crisis, we were measuring case growth based on the exponential growth (steepening slope) and back then, we were looking for exponential –> linear –> decline.

Given that >50% of the US (based on county-level data) is seeing cases >50% off highs, we believe the US is now in the “decline phase”

The diffusion data looking at the county level is equally encouraging.  We now see new highs in % of counties (based on population) with 50% off highs and 75% off highs.

– the 31% of counties 75% off highs is up 900bp in the past week from 22% 
– the 61% of counties 50% off highs is up 900bp in the past week from 52%

Thus, we have seen a significant improvement in just the past 7 days.  


Based on the growing number of counties positioning 50% off peak declines, we are now well into the “decline phase”

Source: COVID tracking project + Johns Hopkins

US daily cases at 24,461 (again, jumpy) but now 31% of US counties (population-based) have cases 75% off highs…
The US has not seen a new COVID-19 breakout in any new metropolitan area since mid-March.  So the case counts we see remain a function of community transmission + testing intensity.  The number of tests has fallen in recent days, so this will have an influence on daily cases reported.  But as long as a new metropolitan area is not seeing an exponential rise in cases (none are), then we can view case counts as a high-level measure of improvements.   

Source: COVID tracking project + Johns Hopkins

On the state level, while many states report higher cases (testing rising), Michigan is the one to watch because of Detroit’s previous breakout…
We show the breakout by state and as we are all accustomed to, this figure can jump by state, especially early in the week (Nate Silver of fivethirtyeight.com first noted this).  But looking at these top 30 states, there is nothing particularly alarming among the states.  In fact, NJ is sub-3,000 (a good thing) and the other top 10 states are mostly stable.

– the one that jumps out at us is the surge in Michigan, with >1,000 cases after two consecutive days ~500.

Source: COVID tracking project + Johns Hopkins


But looking at Detroit specifically (blue line), one can see that the cases per 1mm is still below NYC.  In fact, based on the major cities shown below, the three cities with steadily (linear, not exponential) cases are NYC, Philadelphia, and Chicago.  But the aggregate numbers in those cities are not suggesting a renewed breakout.

– by a country mile, NYC remains the worst.

POINT #3:  Consumer confidence high despite >20% unemployment = positive surprise  and likely reflects extremely timely fiscal response.
The Conference Board reported the latest consumer confidence readings, which came in at 86. 

This figure is down from 118 a month ago (March) and historically, a reading below 100 is consider negative.  And at face value, that is the takeaway.  Consumer Confidence is collapsing because the US economy is completely frozen and there is a lot of uncertainty, particularly on the path of COVID-19 and on the economic outlook.

Consumer Confidence at 86, with 20% unemployment is massively higher than 2002-2003 and 2008-2009 when unemployment rates were lower at 6%-9%…
But another way to look at consumer confidence is to compare it with prior recessions, both the post-Dotcom era (2002-2003) and the GFC (2008-2009).  In those periods, unemployment rates reached 6% and 9%, respectively.

And at the nadir, consumer confidence fell to 60 and 20, respectively, both far lower than the 86 reported in the last survey. Think about that.  More people are out of work today, even during the survey period, and yet, overall confidence is surprisingly high. 

– Looking back at those other periods, an 86 reading was seen when unemployment was just beginning to tick up.

The divergence between UE and Consumer Confidence — is it a lag?  Or is it policy?
So there are several ways to read this divergence, where confidence is relatively high despite the high unemployment, which we list below:

– the confidence is lagging, and will collapse as those “newly unemployed” lose hope, which takes time
– the unemployment rate will keep surging so confidence will COLLAPSE
– the $600 supplemental unemployment insurance is supporting consumer confidence, for those losing work.

The latter might be the factor.


NY state jobless claims data shows unemployment increased by 1,500bp in just the past 6 weeks…
NY state has provided detailed weekly jobless claims data since COVID-19 started.  This data may have been previously available, but we did not use their site previously.  And as shown, state jobless claims increased by 1.3 million in the past 6 weeks.  This is a staggering figure.

– the largest concentration of claims is in food service, retail and surprisingly, Healthcare and social assistance.
– recall, with the drop in elective surgeries, etc, hospitals are facing severe budget shortfalls.

Source: NY Dept of Labor


The 1.3 milion 6-week cumulative claims equates to 15% of the workforce in NY state (see below).  And the greatest hits are:

– Food service with 35% increase in unemployment
– Retail a 22% increase

Again, staggering losses.  

With a starting unemployment rate of ~5%, this 1,500bp increase equals >20% unemployment.

The CARES act income replacement means many workers earn more “unemployed”… is this supporting Consumer Confidence?
The chart below is made by NY Times and by the ISI Evercore economics team.  And it is really telling.  This shows that the supplemental $600 unemployment benefits replace lost income and in fact, for half of states, actually results in higher overall wages.

Source: NY Times


So why is relatively high consumer confidence good?  Likely supports a stronger “re-start” economy as less emotional damage…
We don’t know if the fiscal support is the reason for relatively high consumer confidence.  If that is the case, this is a positive in our view.  After all, protecting consumers during this pandemic-driven economic shutdown is good policy.  Nobody in the world asked for pandemic to cause an economic collapse.

And because consumers have stayed relatively hopeful (if data is correct), one could argue there is a greater propensity for people to want to “get back to their prior life” — and if that is the case, this is a positive.


STRATEGY:  The epi-center Consumer Discretionary sector
The fact that Consumer confidence is holding up is supportive of the idea of buying the “epi-center” of the pandemic.  Stocks that have fallen victim to social distance.  We have been in favor of this approach, as it mirrors the relative outperformance seen during GFC from Oct 2008 to March 2009.  The hardest hit groups rebounded the strongest.

There are many examples this week, from homebuilders, to casinos, to airlines, etc. rallying this week, as COVID-19 looks like it is moving to the “decline phase”

Companies are not going to be able to provide guidance, because they don’t have crystal ball.   And many undecided/skeptical are inclined to see this as a negative.  The logic, which is in fact logical, is that without guidance = earnings visibility weak = P/E contract.  But as we have stated in prior notes, we think 2Q/3Q and even 4Q2020 EPS are write-offs.  And at 15X P/E writing off 2-3 quarters is not changing NPV of future streams (unless there is a permanently lower level set).

An example is Sleep Number below, ticker-SNBR.  The company reported this week and actually declined to give forward guidance.

And as the stock shows, it soared >50% in just a few days, and has actually climbed from $22 to $35 in 3 days.  And is back to early March levels.  This shows the potential upside of buying the epicenter stocks.  

– good companies, with real franchises, will come out stronger out of this crisis.

Consumer Discretionary works best when Consumer Confidence = TROUGH
A few weeks ago, we showed this chart comparing deciles of Consumer Confidence (U Mich, not Conference Board, which is discussed above) and the forward return of Consumer Discretionary sector at each decile.

– The worse the consumer confidence, the stronger the forward return for Discretionary stocks.
– The bottom two deciles (where we will be for the foreseeable future for Consumer Confidence) has historically led to Discretionary rising 88% of the time.
– Forward 12M returns are 20%-30%.   This is since 1971, or ~50 years.

Basically, this is the best time to be long Consumer Discretionary.  Which is also the epicenter of this crisis.

Why?  The rationale is operating leverage.  We will illustrate this in the upcoming notes and also in our call which we plan for Friday. 

Details of the call are forthcoming — hope you can tune in.