STRATEGY: Tide seems to be turning in favor of “half-full”
We are only mid-week but it does seem like the cadence of incoming data has turned favorable, after 4 weeks of worsening COVID-19 cases and re-opening risks:
– Daily US cases are rising at a slower pace
– F-CAT daily cases are plateauing and not much left of the US to “burn down”
– Good news on the vaccine front with Moderna and others
– Stocks are bumping up against cycle highs
This week is a reminder of the importance of binary outcomes and how this “flips” what works…
As we noted yesterday, the Moderna news is a reminder of how “binary” catalysts exist. We have cataloged a few of the potential catalysts, and its impact on investor positioning.
Vaccine developed
– Epicenter/Cyclicals –> BOOM
Cure/ antibody treatment
– Epicenter/Cyclicals –> BOOM
F-CAT cases peak
– Epicenter/Cyclicals –> BOOM
Second wave NY tristate
– Stay at home –> BOOM
White House gets coronavirus
– Stay at home –> BOOM
– Defensives –> BOOM
Deaths begin to rise
– Stay at home –> BOOM
Epicenter stocks were suffering since June 9, 2020 suggests equity markets were losing faith in disease path
As the chart below shows, the epicenter stocks (Discretionary, Industrials, Energy, Financials) suffered a slow bleed since June 9th. That is the date that US cases began to creep up.
And this rotation out of “epicenter” will quickly reverse on one of two factors:
– F-CAT cases peak (AZ, TX look like so)
– Vaccine/cure is developed
Source: Fundstrat
Recent McKinsey analysis underscores the “binary” impact of vaccines…
McKinsey recently published an analysis of when various sectors are expected to recover to 2019 levels. They have two timelines. One for virus-contained (including vaccine) and one for muted recovery. We marked these with arrows. There are huge differences between when a group is expected to recover under the two scenarios.
– hence, the binary effect of vaccine or F-CAT peaking.
– this dramatically shortens the timeline for recovery.
https://www.mckinsey.com/business-functions/risk/our-insights/covid-19-implications-for-business#
We favor Epicenter. The epicenter is 82% of upside for equity markets One way we view the upside in epicenter stocks is to see what S&P 500 “points” gains would be seen if each sector went to its Feb 2020 highs. Technology and FANG have already done this. So it is really Defensives and Epicenter.
– Epicenter would add ~200 points if they went back to Feb 2020 highs, or 83% of potential points
– The epicenter is 26% of market cap
Thus, we can see the risk/reward for epicenter:
– binary winners of vaccine/ F-CAT peak
– 83% of potential upside for equity markets
In the meantime, the “reluctant” equity investors have been buying bond proxies like FANG and Growth.
POINT #1: Daily cases are growing at a “slower rate” = good
Daily cases reached a new all-time high today of 68,793, +6,073 from 1D ago. California is the primary driver with daily cases surging to 11,126 in CA, +3,780 vs 1D ago. As we mentioned earlier this week, surging cases is losing its “shock” value, partially because of the continued curious divergence of cases vs deaths.
Source: COVID-19 Tracking Project
6 states with large 1D increase
California 11,126 vs 7,346 (1D) +3,780
Florida 10,181 vs 9,194 +987
Tennessee 2,273 vs 1,514 +759
Illinois 1,187 vs 707 +480
Georgia 3,871 vs 3,394 +477
Idaho 727 vs 316 +411
Total 6 states +6,894
6 states with large 1D declines
Arizona 3,257 vs 4,273 (1D) -1,016
Washington 547 vs 1,101 -554
South Carolina 1,856 vs 2,221 -365
Nevada 849 vs 1,104 -255
Arkansas 564 vs 794 -230
North Carolina 1,782 vs 1,956 -174
Total 6 states -2,594
The 4 epicenter states, FL, CA, AZ, TX, or F-CAT — AZ and FL look past peak…
The F-CAT states are really the last of the large states to see an outbreak. And as we pointed out yesterday, once F-CAT peaks, >60% of the US would have suffered widespread outbreaks. And much of the remaining 40% are suffering through a coincident outbreak anyways. So once, F-CAT peaks, this first wave is over.
– FL and AZ look like they are past daily case peaks
– TX is probably plateauing but as we noted yesterday, there seems to be significant overflow from imported cases
– CA is also suffering a surge and like many border states, has imported cases from overflow from the border.
So it will take some time for TX and CA to put this surge behind them, but the good news is that all states have taken measures to counter the surge and so we expect cases to soon plateau.
Source: COVID-19 Tracking Project
The rate of increase in USA daily cases is slowing…
A “half-full” observation we make is that the surge in daily cases is slowing, as the 7D delta in daily cases is lower for the past 4 days and the lowest in a week. So accounting for potential “seasonality” in case reporting, it looks like this recent 2-3 surge is seeing reduced energy.
Source: COVID-19 Tracking Project
Source: COVID-19 Tracking Project
POINT #2: Daily deaths have stopped rising and essentially flat…
Daily deaths came in at an unacceptably high 871. But as shown below, this 871 is about flat with daily deaths for the past 10 days or so. And daily deaths are down 68% from their peak in late April.
Source: COVID-19 Tracking Project
The rate of increase in daily deaths (7D delta) has also been flattening as shown below. So, what we saw as a surge in daily deaths last week (+450 7D increase) has stalled and flattened. This is a somewhat encouraging development given daily cases have been surging for 4 weeks now.
Source: COVID-19 Tracking Project
Daily deaths are rising in F-CAT states, to around 400 total…
It is not all positive to see flat deaths, as there is a notable rise in deaths in the F-CAT states. And this is offset by slowing daily deaths in NY tristate.
Source: COVID-19 Tracking Project
But as we have highlighted many times, the cumulative deaths in F-CAT have dramatically trailed what has been seen in NY tristate. Below is a scatter chart:
– x-axis is cumulative cases
– y-axis is cumulative deaths
F-CAT and NY tristate are plotted. As you can see, when both regions had ~624,000 cases, NY tristate have >3X the number of cumulative deaths. So this has been far less deadly for F-CAT relative to NY tristate.
Source: COVID-19 Tracking Project
But as we discuss in the section below, there is a greater share of youth suffering severe consequences and deaths. So, there is a different profile as well.
POINT #3: USA younger adults > share of COVID-19 deaths
One of the tragedies in the US is the relatively higher share of younger adults dying from COVID-19. The economist graph (below) shows that ~45% of the US deaths >age 80, while it is about 60% for UK, Italy, Spain and France. Conversely, the share of deaths age 40-49 is nearly 3X in US vs Europe.
https://www.economist.com/graphic-detail/2020/06/24/when-covid-19-deaths-are-analysed-by-age-america-is-an-outlier?fsrc=scn/tw/te/bl/ed/dailychartwhencovid19deathsareanalysedbyageamericaisanoutliergraphicdetail
One of the reasons for this may be due to smoking and vaping (which is much more popular in the US vs Europe). The CNN health article below cites a study by the Journal of Adolescent Health, which shows that 1 in 3 US adults suffers from a severe form of COVID-19. They define young adult as age 16-25,
https://www.cnn.com/2020/07/13/health/young-adults-smoking-risk-coronavirus-wellness/index.html
But the researchers found a strong association with those adults who smoke or vape and severe infection. In fact, in their study, excluding smokers, the rate of US young adults with severe COVID-19 infections drops to 16%.
https://www.cnn.com/2020/07/13/health/young-adults-smoking-risk-coronavirus-wellness/index.html
FYI, the use of tobacco products, per the CDC, is higher in the southern states. This does not reflect vaping. But this could be a partial explainer for why we are seeing younger adults in F-CAT with more severe outcomes.
