COVID-19 UPDATE: Nationwide protests have effectively cancelled all "shelter at home" restrictions. 2020 might be more "shattered" than 1968. Like 2020, in 1968, stocks disconnected from "mood of America"

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.


Protests erupted across the US, in response to outrage over the death of George Floyd.  And the protests are so widespread, nearly 40 cities in the US have imposed curfews.  Most of the protests are peaceful, but there are reports of looting and violence as well.  What is becoming evident is the mood in America has underlying simmering anger, about the restrictions borne out of the COVID-19 pandemic, political divisiveness, and now senseless death of individuals from perceived abuses of law enforcement tactics.  
Tom Block, our head of Policy Strategy, even emailed the firm over the weekend, commenting on the widespread and passionate protests reminded him of 1968 — then, he was a college student and interning on the Hill.  One of the implications was the permanent damage to many cities and even DC had burned buildings and neighborhoods that did not get repaired for years.  We wrote about 1968 below (see Point #2) and it was called the “Year that shattered America” — it was that bad.  And there are many parallels to today.  Senseless murders.  Pandemic flu killing 100,000 Americans.  Space missions.  Global war.

In 1968, the S&P 500 fell 9% from Jan to March, then rallied >24% to YE and managed a total return of >10% (price gain 7.6%).  So, 2020 and 1968 also share the “disconnect” between the stock market and the political turmoil, violence and general ugly mood of America.  It is a reminder that the equity markets are not ignoring the economic crisis.  In fact (discussed below), the epicenter groups collapse in March.  Many down 80%.  As for COVID-19’s progress, these mass gathering protests, without following social distance protocols, effectively ended “stay at home” for most of the country.  Whatever “stay at home” restrictions, limits on gathering size, etc., — these ended this weekend.  While we are not qualified to judge the healthcare implications of this, these large gatherings effectively canceled all the efforts over the past 10 weeks to “shelter at home” and mitigate transmission.  So, the next 2 weeks will be important to watch.



POINT #1: Cases rising in CA, due to Imperial County, which borders Mexico and is seeing “overflow” from the border…
Total US cases eased over the weekend, but again, as we have seen for each of the past 10 weeks, this drop is pretty typical. The testing lags, office closures and maybe even potential patients waiting after the weekend, etc.

– So cases are down to 21,587 from 23,500 1D ago and 24,770 Friday
– But Sunday-Tuesday tends to be lower than Thu-Sat.
– Total tests administered came in at 375,502, down from 418,351 2D ago.  So this is the weekend effect again.
– The positivity rate was 6.6%, steady with the last few days.

Source: COVID-19 Tracking Project

The drop in administered tests does seem to support the idea that weekend activity just falls naturally.  If someone is symptomatic, perhaps that person waits until the start of the workweek to seek tests as well.  This, in addition, to the facility closures and testing lags.

Source: COVID-19 Tracking Project

CA is seeing case surges…
CA cases are surging and set a new high in each of the last 2 days.  Other states reported higher cases as well, but those other states are falling into the cadence of churn: 

6 states with increases:
– California         3,705 vs 2,992 (1D) +713
– Texas               1,949 vs 1,332         +617
– Michigan             513 vs    263         +250
– South Carolina    467 vs    263         +204
– Georgia                700 vs    616          +84
– New Jersey         837 vs     764         +73
Total 6 states                                   +1,941

5 states with declines:
Wisconsin            173 vs   523 (1D)   -350
Indiana                 363 vs   653           -290
North Carolina     916 vs 1,185          -269
New York           1,110 vs 1,376          -266  <– really falling big
Maryland               763 vs 1,027         -264
Total 5 states                                   -1,439 NY state is seeing continued improvement.  That is a good thing, since NYC is set to re-open on 6/8.

Source: COVID-19 Tracking Project

CA is now seeing more cases than any state…
CA cases are surging, and this is coming as the state is easing restrictions.  In fact, as we commented last week, CA Gov Gavin Newsom is moving to ease restrictions faster than his initial guidelines. So, it does bear watching to see the trajectory in cases, particularly as the state is moving forward to ease restrictions.

– the surge is primarily happening in Imperial County, which in 3 days has seen daily cases rise from 0 to +484/day.

Source: COVID-19 Tracking Project


As highlighted below, the county accounting for the surge is:

– Los Angeles County
– Imperial County

But Imperial is surprising, because the county previously had ZERO cases.  Zero.

Source: CA Health Dept.


Imperial County is on the southern part of CA and borders Mexico as shown below.

Imperial County is seeing imported cases from Mexico…
And as media reports show, the surge seems to be cases of people crossing the border from Mexico to seek treatment.  So Imperial County has imported cases from Mexico.

https://timesofsandiego.com/life/2020/05/29/covid-19-hospitalizations-surge-in-imperial-county-with-overflow-from-mexico/


POINT #2:  Echoes of 1968, which is considered the year “that shattered America” — S&P 500 total return >10% in 1968, after 9% correction, 24% rally March to December 1968.
I received an email from Tom Block, our Head of Policy Strategy today, where he said the headlines over the weekend remind him of 1968.  Back then, Tom Block was in college and an intern on Capitol Hill.  A screenshot of his email is below.

Smithsonian Magazine calls 1968 “The year that shattered America”
Smithsonian Magazine describes 1968 as a year where America endured a series of cataclysmic episodes of bitter political battles that led to lots of violence and death.  In fact, according to the Smithsonian, historian Richard Hofstadter observed that “Americans certainly have a reason to inquire whether…they are not a people of exceptional violence.”

https://www.history.com/news/1968-political-violence

The Smithsonian has a timeline of key events in 1968 and we have included the majority of the listed events below, but the key standouts are:

– 1/23/1968 North Vietnam launches Tet Offensive
– 4/4/1968 MLK assassinated
– 4/23/1968 Columbia students take over 5 buildings protesting the manufacturing of napalm (a military weapon using jellied gasoline)
– 6/19/1968 50,000 American march in DC rallying around ‘Poor People’s Campaign’
– 8/23/1968 Russia invaded Czechoslovakia
– 10/11/1968 Apollo 7 spends more time in space than any Soviet mission

A listing of the timeline is shown below.

https://www.history.com/news/1968-political-violence


How did the S&P 500 perform in 1968? It sold off from Jan to March 1968 and rallied >24% from March to YE…
The price performance of the S&P 500 is shown below.  We have also annotated the chart to show some major world events on the date they took place:

– S&P 500 fell 9% Jan to March
– S&P 500 bottomed 3/4/1969 and rallied >24% to YE
– Total return in 1968 was >10% (7.8% price only)

So 1968 was the year that “shattered America” and many tumultuous events and violence took place in that year.  And despite that, the equity markets managed to perform solidly.  

Source: Bloomberg

1968 also had the H3N2 Pandemic Flu…
Keep in mind in 1968, the world had the H3N2 pandemic flu as well.   And that killed 1 million people worldwide and 100,000 Americans.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3291411/


1968 is a reminder that stocks and world events are not always connected…
Think about this in the modern context.  The stock market does not always fall in an environment of political turmoil and pandemic disease.  1968 is a reminder that what we are seeing in 2020 is like the echoes of 1968.




POINT #3:  Epicenter stocks already fell as much as 80%, so there was deeply concentrated damage in equities…
This weekend, as protests erupted across the US, many wonder if stocks are caught in another reality.  But as we noted above, in 1968, a year considered one of the most tumultuous politically in the US and with great violence and global pandemic, the S&P 500 gained >10% (~8% on price).  But there remains a level of public outrage about this, and we highlight an article from the NY times magazine below (thanks Seth Ginnes for the heads up).

https://www.nytimes.com/interactive/2020/05/26/magazine/stock-market-coronavirus-pandemic.html?referringSource=articleShare

But the stock market did “crash” but that crash was concentrated in the 4 epicenter groups:

– Energy            -57%
– Discretionary  -47%
– Financials       -43%
– Industrials       -42%

All worse than the S&P 500 -35% peak to trough from 2/19/2020 to 3/23/2020 lows.  So, the groups that are at the center of a complete global shutdown did indeed see a collapse.

Source: Bloomberg 


And the “epicenter victim” groups did even worse.  Look at the following:

– Cruise Lines -80%
– Casinos        -69%
– Airlines         -64%
– Hotels           -61%
– Retailers       -47%
– Restaurants  -41% (MCD, etc. helped here)

Basically, there was a complete wipeout of these groups.  This is a bigger beatdown than seen during the GFC.

Source: Bloomberg 

I don’t want to spend too much time on this, but this shows the stock market did correctly see a collapse in the groups hardest hit by COVID-19.  But now as visibility is improving, we are logically seeing these groups see some buying interest.  Hence, we favor investors to add exposure to “epicenter” groups.

And in the past 7D, “epicenter” groups have been leading the market.  We still see good risk/reward for these stocks.

Source: Bloomberg



STRATEGY:  High-yield continues to see strong inflows and healthy issuance, supportive of stocks.  Plus, short interest very high in “epicenter” groups = stocks in control of buyers.
High-yield (HY) is the cousin of equities.  And in our experience, stocks cannot rally if HY is not performing well.  There are exceptions, of course, but the best environment for stocks is to see a very healthy credit market, particularly high-yield. HY does indeed seem to be quite healthy. 

– JPMorgan notes that weekly inflows into HY totaled $6.2 billion last week, the 3rd highest on record.
– 5 of the 10 largest inflows on record happened in the last 9 weeks.

Take a step back. There is incredible demand for HY bonds.  This is supportive of a healthy credit market.  And is good for equities.

Source: JPMorgan HY Research


And it is not just inflows.  According to JPMorgan, HY YTD net issuance is $64 billion, and that is up 63% yoy.  If companies are able to access the credit markets, and HY issuers even, at this pace, one should look at this as reducing “equity risk premia” — hence, P/E multiples should be high.

Source: JPMorgan HY Research


“epicenter” HY issues are the best performers in May = good for “epicenter” stocks
Look at the May performance of HY issues.  The best performing HY bonds have been the epicenter groups.  A 15% rally in Energy bonds!  Wow.  Again, this underscores the fact that the risk/reward in “epicenter” is attractive, if we are seeing such strong HY gains.

Positioning is still short on “epicenter” groups…
JPMorgan’s Flows and Liquidity team have also looked at the YTD change short interest.  What stands out is the rise in short interest for Discretionary is 3 std-deviations and the rise in Energy short interest is 1.5 std deviations.

– Clearly, institutions are not that constructive on these groups. 
– But given the improving visibility, this is a tailwind

Source: JPMorgan