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.
Taking a step back, it is clear that in the past week (few weeks), the US progress against COVID-19 is outperforming expectations. This is evidenced by the case data (which we discuss below) but it is also evident in the powerful recovery of risky assets, both equity and credit (investment-grade and high-yield). In fact, the S&P 500 closed above a key milestone (2,793, specifically, which is a 50% retrace) and since 1929, a bear market recovering 50% of losses historically signals the bottom is in (we realize some of you may protest that we don’t know if this is the low low, but see our comments later, we explain this).
You might think that this recovery in stocks is mere “noise” or a “deadcat bounce” and that we will soon resume a deadly decline. But think of it this way. After February 19th, the equity markets felt into a slide and by the time the first US non-Wuhan/non-cruise case was reported in early March, the S&P 500 was already down 15%. And by end of the first full week of March (10th), the US only reported 300 cases yet the S&P 500 was down 27%.
In other words, as COVID-19 spread, the equity markets were WAY AHEAD of the data.
If this is true, then the converse should be similarly true. After all, if it was “signal” on the velocity of the decline, this blistering recovery is also “signal”–and this milestone is even more critical as S&P 500 closing above 2,793 is a 50% recovery of losses. Since 1929, this has signaled a bottom in.
So in this note, we discuss progress around COVID-19, including some proposed framework by CA and NY governors. But we just observe that the stock market fierce recovery is telling us that the economic recovery path may be a lot steeper than many expect.
POINT #1: With each day passing, it looks like past “apex” for the USA. Still not entirely clear why New York City metro area was worst
From a high level, the incoming data for new cases and even hospitalizations for the US and NY state support the notion that we may already be past-“apex” on daily new case growth. Now this doesn’t mean that there will not be more cases, nor more deaths, rather, this is observing that we are:
– past exponential growth
– past linear growth
– entering declining growth <– we are here!
– towards zero growth
NY state reported 7,177 new COVID-19 cases today. This is an uptick from Monday but this is not the “two-step forward, three steps back” but rather, a lumpy but steady decline in cases.
– Gov Cuomo in his press briefing today was more definitive in his belief we are past the apex. Interestingly, during Q&A, there was some discussion of the “real prevalence” of COVID-19 because testing misses undiagnosed cases plus asymptomatic patients. He and his team estimated at 10%-20% of NY state has or recovered from COVID-19.
– NY state has a reported 10,394 cases per 1mm residents, or about 1% of the state is “confirmed positive” and Cuomo’s team estimated it is closer to 10X to 20X the reported number. Michael Hourigan, of Fortress Investments, shared with me a New England Journal of Medicine article (link to NEJM article) where an NYC hospital administered COVID-19 tests to all incoming birthing mothers and found 13% were positive and yet, 90% of the positives had no symptoms.
New York “net” hospitalizations really underscore the apex is behind NY state. We are close to the crossover where more people are being discharged versus being admitted to NY state hospitals. That is going to be fairly conclusive.
New York remains the frontline for COVID-19 and even as corona has exploded across the USA in the past few months, NY state is still 34% of all cases. This is down from 45% two weeks ago.
– But if outbreaks are local and NY state is only 6% of the total population, then a proportional outbreak across the USA should have pushed NY state down to 6% (matching its population share).
– Instead, as you can see below, NY state is “pinning” itself to 34%.
Now this can mean two things: (i) other states are outperforming NY state (which is our view) or (ii) NY state epidemic is raging and that is why it stays at 34%. But as the case data above shows, NY is past the apex.
There is still a puzzling question that we cannot answer… why did NYC metro see such a plague-level outbreak?
We have written multiple times about how much worse NYC metro fared vs rest of USA, and population density does not explain it (see past FLASHES, but if need more info, contact us). Was it the weather? policy management? Not clear.
To illustrate this better, we compare NY counties, Rockland and Westchester, versus the two largest parishes in New Orleans. Recall, New Orleans has a weaker healthcare system and greater difficulty in controlling its citizen movements (plus there was Mardi Gras).
– yet despite this, Rockland and Westchester blew past New Orleans in terms of cases per 1mm residents.
– Rockland, in particular, went vertical. On a reported basis, there are 25,000 cases per 1mm residents or 2.5% of the population. But if Cuomo’s estimates are right, this implies 25%-50% of the population of Rockland is COVID-19 positive. Astounding.
– Arguably, with levels like this, we believe a vaccine is far less important. If 25% to 50% of the population, even 10% has COVID-19, the risk/cost of a vaccine is far less effective than developing treatment regimens.
Rockland + Westchester county penetration argue strongly treatment > vaccine… and no need to shut down economy
We realize the argument that “treatment” > “vaccine” sounds illogical. But if the exposed population is much greater, than herd immunity is closer. And more importantly, it shows vast numbers of the population are asymptomatic and thus treating those with symptoms is a better risk-adjusted solution. We will write about this in future updates. But it is a thought.
More broadly, the US is showing improvements and continues to outperform NY state…
The US reported total new cases of 25,956 which is an uptick from yesterday but the trend remains lower. Again, the further we move from the high water mark, the more likely that high watermark is the top. And especially if no other states/cities are reporting accelerating outbreaks.
Dr. Birx referred to these cities as the next hotspots outside NYC — Detroit, Philly, DC, Chicago and Houston (you have to squint to see it so we excluded Houston). And of these, DC + Philly + Chicago have bent the curves. And the slope of the line is less steep than NYC.
– Only Detroit has a steeper trajectory. The population of the metro area is 1/4 to 1/5 the size of NYC. So even if Detroit becomes as plagued as NYC, the overall impact on the US case count will be muted because it will be 20% to 25% of the size of NYC.
And while we won’t comment daily, here are the daily new cases by state (per Johns Hopkins). New Jersey seems like it is still reporting high levels of cases and if NY state keeps improving, we could see a flip soon.
– Texas is still rising but the numbers remain a fraction of NY state (like 1/20th)
POINT #2: 50% retracement = BOTTOM IS IN. Even Tom DeMark recently commented to me the same observation
A few weeks ago, we wrote about the fact there is historically quite a lot of symmetry in markets. And the faster the decline, the faster the recovery. Since 1929, there have been 10 declines of >30% and the median time to recover half the losses is 0.50X the speed of the decline.
– the preposterous math implied that the S&P 500 could reach 2,800 by April 13th. And the S&P 500 did indeed re-attain 2,800, almost like clockwork.
– But 2,800 is a big deal. As noted below, this 50% retracement is stronger than the “bear market fake rallies” of 1987, 2002 and 2008 which failed at 24% and 33% retraces.
Thus, closing above 2,800 means the bottom is in. We could pullback 10% (as Rob Sluymer, our Technical Strategist commented on Monday) to 2,500 or so, but we would aggressively buy this.
I recently had a chat with Tom DeMark, we featured him on the March 24, 2020 call, (where he said his work showed the stock market was bottoming on that day and he was correct!). Tom also related to me that because markets recovered 50% of the losses, we are unlikely to “undercut” the low. In other words, we bottomed already at 2,200.
3-waves to this crisis — plenty of bad news ahead…
To state that equities have bottomed defies common sense logic–we agree. After all, we have two waves of bad news coming (see our 3 wave chart below). The first wave is the COVID-19 peak.
– then we have 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.
– but the third wave is the hit taken by “asset owners”: business owners, landlords, banks, supplies, etc.
This third wave will be larger than the “social distance” hit and will likely show growing losses through to September 2020. Hence, stocks bottoming now in March is 6 months before the bad news peaks.
– Is the equity market able to look this far ahead?
– the 50% retrace suggests the stock market is looking past this September 2020 period.
Yup. I cannot justify it but I also learned the hard way (too many times) that I cannot tell the market what to do. And I should just try to understand the message of the market.
But we also know the “true markets bottoms” take place before jobless claims peak… thus, we might be seeing peak claims now
It is worth remembering that market bottom before jobless claims peak. The chart below shows 2002 and 2009 and as shown below, the S&P 500 bottomed 2-4 weeks before jobless claims peaked.
– it bottomed even as the economy was shedding jobs.
– and in both instances, recovered to prior price levels 12 months before GDP recovered.
POINT #3: State Governors developing a framework for the “way forward”
The restart of the economy remains uncertain. Gavin Newsom, CA governor, published a statement that included 6 indicators to guide when to “restart” their economy. This is included below.
It is all logical. It involves the steps of:
– monitoring (contact tracing)
– prevention for at-risk people
– surge healthcare protocol
– therapies needed
– new rules to mandate social distance in biz and schools
– rules to “stop musical chairs”
This is a tall order. If this is the process, CA may not open for a long time. Let’s hope this is not the base case.
POINT #4: Most clients remain uncertain = bearish, affirmed by recent BofA Merrill Fund Manager Survey. Still elevated VIX acts as a tax for a bearish stance (put buyers)
We have been involved in many conversations recently about the state of investor sentiment. Most argue that “other people” are bullish. How else can we explain the fact stocks are up 25%-30% from the lows.
But these same conversations observe that they are personally skeptical of the rally because there is so much bad news ahead. In other words, everyone seems to believe everyone else is bullish but they are personally bearish.
Collectively, we find most of our clients are either bearish (due to fundamentals) or uncertain (due to fundamentals). But recall, uncertainty = bearishness from a positioning perspective.
The latest BofA Merrill Fund Manager survey affirms this. We highlight some of the insights from their April report (using twitter snapshots)
– cash levels at 5.9% is highest since 9/11/2001–the last time the world felt this insecure. Wow.
Look at the OW positions — all defensive, especially cash.
And 75% of investors see a U-shaped or W-shaped economic recovery. No wonder everyone is bearish, their base case is a dead economy.
As a side note, keep in mind, the VIX at 38 is somewhat elevated, making “put” protection expensive — aka tax on the bears
The VIX has remained elevated. And I see this as negative, in the sense that the market is implying wide moves.
But at the same time, elevated VIX means calls and puts are expensive. And for those bearish, particularly those using “put” (bet on the downside), this is expensive. In other words, an elevated VIX makes being bearish expensive and could lead to an eventual short covering.
POINT #5: The upside of WFH (“Work from home”), Isaac Newton and Shakespeare did their best work during the Plague
It is also to keep in mind that not everything is harmed because the US and the world are working from home. I have to remind myself that this state of crisis will lead to good things.
And if we need inspiration, keep in mind, that William Shakespeare and Isaac Newton did their best work during the plague.
– For Shakespeare, because of the Plague of the early 1606s, Shakespeare chose not to tour with his troupe (to outer London) and instead “worked from home” during the Plague. The Plague ended London’s boy companies (a type of performance), favoring Shakespeare’s plays. And the tragedy of the plague inspired him to create some of the best drama including the scene from The Winters Tale. Guardian 2015 article on Shakespeare
– Isaac Newton was a student at Trinity College in Cambridge when the Great Plague of London hit. He was sent home and “worked from home” and he referred to those years as “years of wonder”. And that is where he saw the famous “apple tree”. WP article on Newton
In the 2020 context, this tells us that COVID-19 is leading/accelerating creative destruction (ala Shakespeare). And some ingenious people are inventing new solutions and ideas while working from home (ala Newton).
