COVID-19 UPDATE: Daily cases rise over weekend, yet hospitalizations + death in persistent downtrend (both 90% down from peak). Past 4 US pandemics saw vaccines developed 4-9 months, vs 12-18 expected for COVID-19. 32 Epicenter stock ideas.
In the US, today is Father's Day. The holiday originated in Spokane, WA at the YMCA in 1910 by Sonora Smart Dodd, who herself was born in Arkansas. Her father was a Civil War veteran and a single parent who raised 6 kids. So, Happy Father's Day to everyone who is a parent, has a parent (or knows a parent).
The improving narrative around COVID-19 has been setback because many states in the US are seeing a rise in cases. There has been some alarm raised recently given the rise in US COVID-19 cases. In fact, cases have also risen in Western Europe (Germany, see below). But cases alone is not the reason to be wary -- it is the risk that cases drive hospitalizations, which drive ICUs/deaths and therefore, further health and economic tragedy.
Notably, the states seeing sustained rises in cases are not seeing a proportionate rise in healthcare utilization (hospitalization rate) -- Texas, Florida, Arizona, California, Utah and to a decreasing extent, Arkansas (looks like it has already peaked). This continues to be the case, even for states like California.
And while some see this as an indictment of state openings, the timeline for the case increases is more consistent with the nationwide protests (>3 weeks now), rather than economic re-opening. 6 states account for 94% increase in cases over the past week --> TX, FL, AZ, CA, OK and Iowa. Hence, why would closing the states be the solution? Mitigation steps certainly need to be taken, but among the menu of options, closing a state seems the least likely. Even Germany, which is seeing its R0 surge to 2.9 is not planning to rollback any easing of restrictions (see below).
As markets focus on 2H2020, we thought it would be useful to take quick stock of where our analysis drives differing views relative to a consensus baseline. We list 7 items below, which collectively, suggest we are more optimistic than baseline for a US recovery.
- rise in US cases more attributable to nationwide protests >350 cities rather than state re-opening
- mitigation measures do not require states to "close" but course correction needed
- curious divergence as US cases rising but hospitalizations and death falling, unusual divergence
- consensus vaccine timeline 12-18 conservative given last 4 US pandemics saw vaccine developed 4-9 months from virus ID
- US economy showing ever more "V" shape recoveries
- employment losses > income losses, so the US consumer recovers more quickly
- corporates will find deep cost savings in 2021, hence, 2021 EPS likely to surpass 2019 EPS
The US remains the best performing asset class in 1H2020 (YTD, really) and NASDAQ is even beating the almighty Treasury bond. In an ironic way, the NASDAQ is a better safety trade than bonds, when it comes to pricing in a global pandemic and global depression. Even S&P 500 Growth stocks (65% of S&P 500) is almost as good a proxy as a US bond. If this is the case, it further reinforces our view that US corporates likely get re-rated higher post-crisis, because they are not only "unkillable" but have proven considerable resilience. This is a stress test for markets that we have not seen for 5 lifetimes and likely never see again.
