It is a painful way to end this week. Equity markets fell sharply today, down ~6%, and retracing all gains since Memorial Day. The selling was intense and widespread, with few stocks spared and was the scariest day in markets since the 3/23/2020 lows. A big down day like this was overdue, given the extended and relentless gains. Because this was a more intense day of selling, compared to days we have seen in the past few weeks, the natural question is whether this is the start of a broader sell-off.
Fear certainly rose today, as the spot VIX surged to 40 and posted a 66% gain in just 3 trading days (super rare). But as the chart below shows, such spikes in the VIX often mark the end of a sell-off, not the start. Sure, there are exceptions and the only real one in the past decade is mid-2015, where the spike was an interim low, but stocks were on their way to lower lows by August 2015. The dynamic is different today for many reasons.
If this is the start of a broader sell-off, the one thing to be mindful of is who needs to de-lever? There are still tons of cash on the sidelines. CFTC positioning data shows institutions are largely risk-off. Sentiment is still weak. The only constituents really bullish are Robinhood investors (Millennials) but retail broadly is bearish, particularly Baby Boomers (AAII and also record retail money market cash). So, there is not a lot of de-leveraging that is needed.
Plus, credit is holding up reasonably well. And as JPMorgan comments, credit is strong because of “real buyers” not TINA buyers or Fed-liquidity. As such, credit is a good signal and its strength supports equity valuations.
Source: JPMorgan US Fixed Income Weekly
On the health side, the whole timeline is fractured on COVID-19 due to the nationwide protests (super spreader events) but we are now on Day 14 (since first nationwide protests) and there is not any evidence of a parabolic surge in new cases. While officials say, “it takes 3 weeks,” this was not the case with Italy’s Champion-League soccer event (see below). From the event to day 7, daily reported cases in Italy were 131X and by day 14, 587X and by day 21, 2,131X — so it took only 7 days to germinate a massive spread. The fact we have not seen this is actually quite positive.
Nearly the same time, there was a well-publicized case of a Missouri hairstylist who was infected and served 140 clients on 5/25/2020. It has been 17 days, and as discussed below, there have been zero cases of transmission to any of those 140 clients.
The confirmed cases are rising in the US and the focus has been CA, TX and AZ but also other states and it is widely seen as a referendum on the economic opening. But as we have pointed out, the surge in those 3 states is taking place along the US-Mexico border (see below) and is widely reported to be overflow imported from Mexico — not due to the economic re-opening.
So, I would say that the COVID-19 outlook is mixed. Cases are up, but not in a parabolic, accelerating manner that could stem from the nationwide protests. And this, in itself, is positive. But this disease remains difficult to understand and the future is uncertain. And cases are up.
POINT #1: Daily cases rise +1,918 (+9%) to 22,282 as daily testing increases 6.4%…
Total USA cases rose to 22,282 or +1,918 vs 1D ago as several states reported increases. The day by day reporting can be volatile (testing lags, etc.) but the cases are higher vs 7D ago. So cases are higher today on a seasonally adjusted basis.
Source: COVID-19 Tracking Project
The 7D change tends to be a way to smooth out the day by day noise and as you can see, there is a rise of +1,671 vs 1 week ago. So, cases are higher. We have written commentary there are many states with increased cases, but a lot of it is due to increased testing. And 5 states have higher case growth and hospitalizations (Arkansas and Utah, plus the border states, CA, TX and AZ).
– by the way, most of the states (except for 3-4) have higher cases and flat to down hospitalizations.
Source: COVID-19 Tracking Project
Even NY Gov. Cuomo today commented that the metric that is most important to him is daily testing and the associated positivity rate. This is probably going to supersede daily cases and hospitalizations.
Source: NY Gov office
6 states with sizable increases
California 3,090 vs 2,702 (1D) +388
Florida 1,698 vs 1,371 +327
North Carolina 1,310 vs 1,011 +299
Alabama 856 vs 567 +289
Georgia 993 vs 731 +262
Massachusetts 511 vs 267 +244
Total 6 states +1,809
3 states report sizable declines
Texas 1,826 vs 2,504 (1D) -678
Arizona 1,412 vs 1,556 -144
Kentucky 62 vs 175 -113
Total 3 states -935
Source: COVID-19 Tracking Project
Total tests crept up today, rising 6.4% to 465,989, Total cases rose 9.4%, so most of the rise is due to the increases in testing. The rise in testing is a good thing overall. But it is making case numbers less an organic story, but instead, one of detection (more tests). And the fact that cases and hospitalizations are moving in different directions does suggest Gov. Cuomo is right and positivity may become more important. And seeing that rate fall. At this stage, that may be more appropriate.
Source: COVID-19 Tracking Project
POINT #2: Day 14 since nationwide protests, no second wave. Remember 5/25 Missouri hair salon? = zero spread.
No protest-driven resurgence and officials now say “it will take 3 weeks” which = June 18th
It has been 14 days since the nationwide protests erupted over Black Lives Matter. And as we have written in multiple commentaries, there has been no evident surge in cases. But in the name of prudence, officials and clients would rather err on the side of “give it time” and as Harris County Judge Lina Hidalgo (in charge of Houston’s COVID-19 response) commented today at the press conference:
Source: Transcript Houston press briefing 6/11/2020
3 weeks is too long:
– the patient is infection pre-symptomatic, meaning day 1
– 50% of patients are symptomatic by day 5
– 92% by day 14
So by day 7, the R0 should be very high, because these people are pre-symptomatic and would have already contacted multiple others.
In the case of Italy, 14 days after the Champions League event, daily cases 587X
Thus, officials want to give it another week. But we should have already seen a surge in cases. These nationwide protests took place in >350 cities/town and involved likely nearly 1 million Americans. So, this is densely gathered and for long duration gatherings, the perfect environment for a super spreader event.
Take a look at how cases progressed in Italy, after the 2/19/2020 Champions League event:
– by day 7, daily reported cases were 131X
– by day 14, daily reported cases were 587X
– by day 21, daily reported cases were 2,313X
Source: Johns Hopkins
It did not take more than 7 days to see a massive surge in daily reported cases and by day 14, it was already pandemic. We are already past day 14.
Remember that 5/25 case of the Missouri Hairstylist with COVID-19 who served 84 clients? 17 days since = zero spread
Do you remember that Springfield, MO hairstylist who was infected with COVID-19 and served 84 clients? Of which, many did not wear face masks? The original story, as published by the Kansas City Star, is highlighted below:
– the event took place 5/25/2020
– hairstylist infected a co-worker
– contract tracing showed one served 84 clients and the other ~60
This was a widely reported story, high-browing the risks that reckless Missouri is taking by opening too early.
https://www.kansascity.com/news/coronavirus/article242946596.html
It has been 17 days, which is well past the 99% incubation period, and there has been zero infection spread. None of the 140 clients got infected. This is quite remarkable and highlights that re-opening risks may be lower than we realize.
https://www.kansascity.com/news/coronavirus/article243395651.html
Even NY Post highlighting how NYC officials puzzled why no spike since the protests started 2 weeks ago…
The NY Post carried a similar story today.
https://nypost.com/2020/06/11/experts-unsure-if-george-floyd-protests-will-cause-covid-19-spike/
Officials in every city are understandably concerned that we should be seeing a spike in cases, stemming from protests. But this has not yet taken place.
https://nypost.com/2020/06/11/experts-unsure-if-george-floyd-protests-will-cause-covid-19-spike/
We believe only 2 states have seen a real increase in cases + hospitalization, excluding test — AR and UT. Plus, the imported cases for TX, CA and AZ
This takes us back to how the rise in cases being widely reported is technically correct, but it is not clear that the case rises is due to organic spread, versus either:
– greater testing
– imported cases along the US-Mexico border
9 states notably higher daily cases, but hospitalizations flat to down:
– Alaska 44 days open
– Mississippi 44
– Alabama 41
– Colorado 40
– Florida 37
– South Carolina 37
– Arizona 40
– Texas 40
– California 33
2 states with notably higher daily cases and higher hospitalizations:
– Arkansas 87 days open
– Utah 87
And typically, hospitalizations and cases tend to track each other, like NY state, there was no lag…
Cases and hospitalizations tend to track each other, as this was the case in NY state below.
– the exception is if testing is expanding, hence, case detection can rise
– hospitalizations may not follow
Or this could stem from milder cases being detected, and not requiring hospitalization.
Source: NY state health dept
Take a look at 4 of the states from the list of “cases rising but hospitalization flat to down”…
We have provided overlays so you can see the trends in daily cases for the states of AL, Alaska, SC and Florida.
– As you can see, daily cases are up but hospitalizations have not followed
– So it does suggest that better testing is contributing to discovered cases
– Or it could be that the disease is in milder forms in these cases
Source: Fundstrat and State Health Dept
POINT #3: Border-zone –> TX, CA and AZ. Houston official misquoted and city not at ‘precipice of disaster’
In our commentary yesterday, we noted how the cases seen in the border states–TX, CA and AZ–have been clustered near the border and combining that with the fact that >50% of new cases are of Hispanic ethnicity (>70% in CA), suggest these cases are overflow from Mexico. In fact, this has been widely reported in the media (May 27th Washington Post story).
These 3 states are seeing a surge in cases, but it is not a consequence of the re-opening, nor of the protests. In our view, this surge stems from the overflow from Mexico. And the resulting community transmission. So, this is less due to the mobility consequences of the re-opening.
But several of our clients asked for us to give them a better sense of how cases are clustered along the border. Our data science team made these graphics highlighting the distribution of the increase in daily COVID-19 cases. The color coding shows places with the largest increase (red) and greys for the least:
– Arizona, the entire surge is at the border;
– California, the surge is in the southern part of the state, particularly along the border;
– Texas has the surges in the big cities, so this is different. But Texas population is in the major cities.
Source: Fundstrat and State Health Dept records
Bloomberg story says Houston on ‘precipice of disaster’
John Spallanzani, of Miller Value Partners, shot me this headline this evening with the subject “true headline”?
The headline is shocking as it says Houston is on the precipice of disaster. Moreover, the article goes on to say:
– the city is close to imposing a stay-at-home order
– implies the city needs to re-open the hospital created inside the football stadium
Source: Bloomberg
Actual transcript from the press briefing shows that comment in context…
I decided to read the transcript of the actual press briefing held by Harris County Judge Lina Hidalgo and Houston Mayor Sylvester Turner. I have attached the key excerpts below:
Source: Houston officials transcript from June 11, 2020.
So what really happened in Houston today?
– the existing stay-home/work-safe order expired June 10, 2020 (yesterday at midnight)
– daily cases are rising but “significantly but not dangerously”
– as for hospitals, “we have ample capacity as a whole’
Houston daily cases and hospitalizations are also not that alarming…
Below is the daily COVID-19 cases reported by Houston and net hospital admissions.
– Daily cases are higher
– Yet, hospitalizations are flat to down
So again, this is not a pattern of rising cases and increases hospitalizations.
Source: Texas Department of State Health Services
Houston tends to have hospital capacity issue during flu season… so this is not COVID-19 specific
So Houston hardly sounds like it is at the precipice of a disaster. In fact, as Dr. Persse, one of the Houston officials, commented below, Houston tends to have hospital capacity issues during flu season.
– as Dr. Persse notes, “every year during flu season, we start seeing hospitals fill up”
Source: Houston officials transcript from June 11, 2020.
