Stocks sold off sharply last week and based on our multiple conversations with clients last week, two things came up frequently:
– first, investors are leary of the rise in reported COVID-19 cases because gov’t may be forced to “pause’
– second, investors feel stocks have advanced too far ahead of fundamentals
In our view, we remain very constructive on stocks. We see fundamental catalysts to support “upside surprise” to fundamentals driven by what looks like more and more V-shaped recoveries in the US and elsewhere. And we see strong liquidity support. After all, with $5T in money market funds on the sidelines, a Fed with “unlimited support” and private equity sitting on $2T, any money an investor puts to work today has $10T plus behind it. And the incremental health data was mostly encouraging over the weekend.
The China economic recovery is now turning into a bonafide V-shape. And as pointed out by JPMorgan Chief Economist, Bruce Kasman, it is led by exports.
Source: JPMorgan
The China PMIs, both manufacturing and services certainly show a vigorous recovery. China and US are essentially the only 2 real independent drivers of global demand. Hence, the V-shaped rebound in China is already pointing to a Global “V”
High-frequency US economic data is also showing vigorous consumer recovery and even jobs strength…
The US consumer remains resilient, whether looking at the increasing mobility or consumer spending behavior. For instance, Chase is now disclosing their consumer credit spending tracker (below) and as you can see, consumer spending has recovered 90% of its pre-COVID levels.
– this confirms something that we noted months earlier — the job losses > income losses, given the low median income of those impacted
– hence, consumer spending is recovering faster than jobs
But our clients recall that in last week’s commentary, we noted how Deep Macro’s job posting model was showing characteristics of a V-shaped payroll recovery (due to high correlations of postings) and as JPMorgan’s alternative data model shows, this V-shaped labor recovery also seems underway.
Is “Daily Confirmed Cases” accurately reflecting COVID-19 status in USA? The incremental hospitalization rate is only 7% now vs 28% 10 weeks ago…
Of course, this economic recovery needs to be safely underway, without risk of creating a second wave of cases, hospitalizations and deaths. The media is reporting the rise in cases across the US, and as we have written, it is technically correct — cases are up, but this seems to be reflected better detection, rather than a surge in cases requiring hospitalizations. Look below:
– Daily cases are rising in the “yellow” states, re-opened between 5/1 and 5/11.
– Hospitalizations and deaths for those “yellow” states keep falling.
Source: COVID-19 Tracking Project and Fundstrat
POINT #1: Total tests hit >631,000 over the weekend, a new high. Total COVID-19 cases steady at 20,000
Total US cases were steady, mostly, over the weekend, with Sunday night’s tally at 20,902. This is about flat with where it was at the end of last week.
– testing reached a new high, surpassing 631,000 on Friday, >537,000 Saturday and was ~485,000.
– so far, there are no signs of a second wave stemming from the nationwide protests.
Source: COVID-19 Tracking Project
2 states reporting increases
Tennessee 891 vs 415 (1D) +476
Alabama 1,014 vs 891 +123
Total 2 states +599
6 states reporting sizable declines
Louisiana 336 vs 1,288 (1D) -952
Florida 2,016 vs 2,581 -565
Texas 1,843 vs 2,331 -488
California 3,212 vs 3,660 -448
Arizona 1,233 vs 1,540 -307
Maryland 396 vs 692 -296
Total 6 states -3,056
We include a 7D change in cases chart below, to normalize for the seasonal variations of the weekdays. And as shown, daily cases are up +1,752 from this Sunday from a week ago. That is an increase.
– Daily cases are higher by 9% vs a week ago
– Tests are up 6.3% from a week ago
So the increase in tests is accounting for most of this increase.
Source: COVID-19 Tracking Project
Source: COVID-19 Tracking Project
POINT #2: Cases are diverging from Hospitalizations and from Deaths. Incremental hospitalization rate now 7% vs 28% 10 weeks ago…
Many of our clients have noted that “confirmed cases” is becoming a less ideal measure of COVID-19 spread, because of improved testing. And last week, NY Gov Cuomo even offered that “positivity” rates is a better metric than cases, because of wider testing.
– But we think even “positivity’ is less than ideal, unless COVID-19 severity ratios remain constant.
– that is, if the rate of hospitalizations tracks the rate of growth of cases.
But the summary charts below show this is not the case:
– cases are flat
– deaths are falling
– hospitalizations are falling.
Source: COVID-19 Tracking Project and Fundstrat
US cases down 42% from the peak while hospitalizations down 90% from the peak. So hospitalizations have improved at 2X the rate of cases. This is seen across most of the states (see the PDF).
Source: COVID-19 Tracking Project
Incremental hospitalizations per incremental case is falling to 7% (of cases) vs 28% 10 weeks ago
We calculated the ratio of incremental hospitalizations vs new cases and the nationwide figure is down to 7%. And as you can see, this figure has been falling.
– Is COVID-19 become less severe/deadly? Thus, the fall in hospitalizations?
– Or is this due to better testing?
Time will tell.
Even Florida Governor Rick DeSantis has commented on this divergence…
Brian Rauscher, our Global Head of Portfolio Strategy, passed along comments from FL Gov Rick DeSantis over the weekend, essentially affirming what we have been seeing. That cases are up, due to better detection, but hospitalizations and associated healthcare burden is not rising.
Source: FL Gov Rick DeSantis
We plotted cases and hospitalizations below. And as is clear, there is no longer any linkage. Cases are soaring and hospitalizations are trending down.
– Gov DeSantis notes the recent surge in Florida stems from an outbreak at a farm in upper Florida.
Source: COVID-19 Tracking Project
POINT #3: Germany set to launch contact tracing app, following Italy last week. In US, each state to decide and only 4 of 50 support Exposures Notification API in iOS and Android
According to a story by Reuters, Germany’s Health Minister, Jens Spahn, said Germany’s smartphone app to trace Coronavirus is set to launch this week. According to the media story, the most recent gating factor was ensuring Bluetooth would work at correct distances. Based on what we can gather, the following countries, outside of Asia, have deployed a smartphone-based app:
– Italy called ‘Immuni’
– France has ‘StopCovid’
– Norway ‘Smittestropp’ (stop infection)
– Australia ‘Covidsafe’
– India ‘Aarogya Setu’
https://www.reuters.com/article/us-health-coronavirus-germany-app/germany-says-coronavirus-tracing-app-ready-to-go-idUSKBN23L0P5
Europe contract tracing apps specific to each nation, but given opening borders, not clear how they ensure interoperability across apps…
Borders across Europe are opening and as a consequence, the movement of workers, tourists, officials, students will start to take place. But ideally, contact tracing would be useful across apps and across borders. It is not clear if this is the case, but it is unlikely. After all, I have not heard this being touted as a feature.
Below is a screenshot of the smartphone app used by Italy. I am not sure how Apple calculates these rankings (is it in the context of where the app is to be used or where I did the search) but it is #1 in Medical.
Source: Apple App Store
Norway’s ‘Smittestropp’ app is #9 in the Lifestyle store. So this one does not fall into Medical. Again, I have no idea why.
Source: Apple App Store
The developer for the French app is ‘Gouvernement Francais’ and this one gets ‘4 stars’.
Source: Apple App Store
In the US, each state is developing its own application for contact tracing… and 4 of 50 have confirmed participation in a standard ‘Exposure Notification API’
The development of contact tracing in the US is taking place at the state level, based on guidelines developed by each state’s health agency. And several articles show that states are taking their own approach, with many deciding that a ‘smartphone app’ based tracing is not in their development plans. Instead, just human contact tracers:
– per Business Insider (June 10th article).
https://www.businessinsider.com/apple-google-coronavirus-contact-tracing-tech-states-dont-plan-using-2020-6
9to5mac conducted its own survey to see which states will participate in Apple’s Exposure Notification API. And based on their survey results, only 4 states plan to participate.
https://9to5mac.com/2020/06/05/covid-19-exposure-notification-api-states/
We previously wrote about the app developed and now used by North and South Dakota have started using a GPS-based app called Care 19. And it turns out Utah is using an app called Healthy Together that uses both Bluetooth and GPS location data. But it seems like there is little interest in states building apps around the jointly developed Google/Apple Exposure notification API.
The initial spread of COVID-19 from NYC to LAX via continental flights underscores need to better national contact tracing…
If we ever need a reminder of why contact tracing needs to be interoperable between states, it is lessons from the early days of COVID-19. The Los Angeles Times published an article today, highlighting how an infected retired Manhattan surgeon was one of the first persons to bring COVID-19 to California. And despite requiring medical attention within a day of arrival, none of the other 200 passengers on that flight was notified or subsequently contacted.
https://www.latimes.com/california/story/2020-06-14/travelers-flew-into-lax-with-coronavirus-passengers-were-not-warned
Regional smartphone apps (state level) would be unlikely to be downloaded by an out of state worker, visitor, tourist, etc and thus, never be aware of contact tracing. And this is even less likely if a state chooses to use actual contact tracers.
– How would one contact all the people who stopped at the same location?
As long as interstate and international mobility is taking place, the obvious issue is contact tracing needs to encompass that footprint…
I don’t have any simple answers, but in the post-COVID-19 world, it seems that state-level contact tracing will not be effective for cities seeing significant interstate and international visitors. I guess one way to deal with this is requiring the downloading of an app at the arrival to an airport or state border. But even that seems unwieldy.
– No simple answers.
Below is a screenshot of the API developed by Apple and Google, called the Exposure Notification API. This is not the only approach and the Massachusetts Institute of Technology’s Lincoln Laboratory is developing a system using Bluetooth signals as well.
And below is the official guidance from the CDC for contact tracing. Again, the CDC is leaving this for the states to decide. This is a state-level decision, but it is surprising that the governor of each of the states has not jointly supported the creation of a single app to contact trace.
https://www.cdc.gov/coronavirus/2019-ncov/downloads/php/prelim-eval-criteria-digital-contact-tracing.pdf
STRATEGY: China “V-shaped” + evidence of US “V-shape” + credit favoring “epicenter” bonds = OW Epicenter stocks
Being OW stocks is not a consensus position, when we consider the high levels of money market cash, the weak sentiment by AAII investors, by the CFTC positioning data and even based upon our multiple conversations over the past week. Even those who are constructive on an economic recovery believe that stocks seem expensive.
But given the paucity of investors who are outright OW stocks, if we take a step back and think about investor equity perceptions (too risky) vs investor equity positioning (cash sidelines), the ability to surprise on the “upside” remains more powerful.
In other words, we are buyers of this dip. The risk/reward still remains attractive and we see stocks in the hands of buyers.
Credit is favoring “epicenter” bonds…hmmm, sounds like should be good for stocks.
We highlight commentary from JPMorgan’s weekly “The View” and as their strategists note, credit is favoring epicenter bonds — those hit the hardest are still rallying the most.
– and interestingly, they expect this to continue.
– if the credit of epicenter stocks rally, this is supportive of the equities.
Source: JPMorgan
Epicenter stocks still attractive risk/reward. 35 Large-cap ideas and 49 SMID-cap ideas…
The bottom line, we think this period of equity weakness will be short-lived. The driver to shift this weakness:
– economic momentum strengthening in the US
– US COVID-19 cases, while up, is not leading to a surge in hospitalizations, hence, less risk to pare back
– China recovery V-shaped
– epicenter credits rallying strongest
