***ALERT: No FLASH Wednesday morning (7/29) as research team upgrading our equipment (upgrading tireless Ken to iOS 11.2). Our next FLASH will be Thursday morning(7/30) ***
Well, the surge in COVID-19 cases in the US is almost certainly over. Today’s daily COVID-19 new cases was 54,827, the lowest in 3 weeks and 4 of 4 “epicenter” states, FL, CA, AZ, TX, or F-CAT, reported <10,000 daily cases (first time in three weeks). Thus, we are now at the stage where we wonder when the general public and media also concur that this surge is ending. Daily deaths are up but they are not going parabolic in the same manner causes exploded in July.
Source: COVID-19 Tracking Project
And now it is 8 consecutive days where daily cases are lower vs 7D ago. This remains a break in trend and suggests the disease is reproducing at a declining rate (R0<1).
Source: COVID-19 Tracking Project
But the public remains skeptical –> “fool me once…”
We all know this phrase. But Michael (from the Office) said this his hysterically best:
– Fool me once, Strike one
– Fool me twice, Strike 3
Link to YouTube clip is below… it makes me laugh every time.
https://www.youtube.com/watch?v=svznuiA0JZ8
So investors are going to be skeptical, even if F-CAT cases are peaking:
– VA, IL, MI, MD and PA all had cases fall and then suddenly surge.
– Americans are scared now and they will not venture at the same pace again
– etc.
We grouped this “fool me once” into 3 categories:
– disease path
– healthcare cure/vaccine
– return to “normal”
See below.
Thus, the bar is high for markets and the public to feel safe again. And this delay in the conclusions is what is likely causing equity markets to act “defensive.”
STRATEGY: Virus path = Strategy direction. Market pricing “virus stronger” scenario
We hope you tune into our Webinar this Thursday (July 30th). We are working on quite a few new materials and plan to cover some important topics:
– COVID-19 cases plateau and what this means
– Why GDP <> EPS <> Stocks
– 2020 Election dynamics (Tom Block)
– The “Epicenter” groups struggle now, but what about in a month?
– Factors behind equity resilience, 2021 implications — both market and demographic
– “Granny shots” outperforming in 2020
We want to expand on our prior discussions about how strategies and positioning are governed by the path of the virus. The roadmap below is a stylized roadmap. But in short:
– In early June, the virus was weakening = outperformance of “epicenter” groups (Industrials, Financials, Discretionary, Energy) and Value
– But as virus cases surge in mid-July, markets rotated heavily into bond proxies/secular growth + momentum
The spectrum of positioning below reflects the appropriate and logical strategy in that context. And again, as long as investors feel the virus is strengthening and this risks economic resurgence, defensive-like strategies will prevail.
Thus, the reason we favor epicenter groups is our view that the virus has peaked. This will take some time for markets to be convinced. But of course, lots can go wrong:
– NY tristate could have a second wave
– Teenagers are causing some super spreader events
– Headlines around MLB game cancellations underscore the fragility of progress without a cure
– Google extended stay at home until next Summer
But equity markets remain bid. They are bid because there is so much cash on the sidelines. And investor sentiment remains awful. Do we still think this cash only buys Growth and Momentum? In our view, if the virus is weakening (our view), the answer is no. We think the epicenter stocks will surge.
But it is painful. The epicenter names are oversold but there are no buyers. Perhaps the saving grace is there is very little down trading volume in epicenter stocks. It is the norm to see high volume on the downside and lower volume on rallies.
– Currently, we are seeing light volume on the epicenter selling –> seller exhaustion?
To quote our Head of Technical Strategy, Rob Slumyer:
“I’d recommend waiting this pullback out and be looking for trading bottom to develop within the week.”
So Rob is expecting near-term weakness but a bottom soon. Very soon.
POINT 1: US Daily COVID-19 cases crashing downwards = good
It looks pretty conclusive that COVID-19 cases indeed peaked last week. Daily COVID-19 cases came in at 54,827, the lowest level of daily new cases in 21 days (since 7/7).
– Once FL, CA, AZ, TX, or F-CAT, peaked, there is not much of the US that is still “burning”
– we realized reported daily cases tend to be lower on Sunday/Mondays but as we noted above, the daily figure vs 7D ago tends to capture seasonality
– this 7D delta is falling now, 8 consecutive days.
– it was soaring in June/July
Source: COVID-19 Tracking Project
6 states reported sizeable 1D increases
Alabama 1,821 vs 1,164 (1D) +657
Virginia 1,505 vs 958 +547
Maryland 1,128 vs 694 +434
Ohio 1,104 vs 889 +215
Kentucky 522 vs 315 +207
New Mexico 460 vs 254 +206
Total 6 states +2,266
6 states reported sizeable 1D decreases
Texas 4,267 vs 5,810 (1D) -1,543
Louisiana 2,343 vs 3,840 -1,497
California 6,891 vs 8,259 -1,368
Tennessee 2,553 vs 3,140 -587
Mississippi 653 vs 1,207 -554
Michigan 488 vs 1,041 -553
Total 6 states -6,102
Source: COVID-19 Tracking Project
The trend in hospitalizations remains solid as well. Take a look at “net hospitalizations” or a proxy for how many are in a hospital. It is now falling. This is a break in trend and a good thing.
POINT 2: Every single F-CAT reported <10,000 daily cases
The best measure for the improvement seen in F-CAT is the fact that not a single state reported 10,000 or more. In fact, the daily cases charts look like they are sharply rolling over.
Source: COVID-19 Tracking Project
How long before daily cases fall 75% and 90% in F-CAT? If they follow NY tristate, 25 and 46 days…
Recall we previously commented that NY tristate saw a sharp decline in cases, once the final apex was reached. Here is the data again below.
Source: State health websites
And the composite of these 5 states is shown below. As you can see, they all follow roughly the same pattern of a crushing decline in daily cases. This is consistent with the idea that once a state reaches the “break point” of infection, then the slowing of daily cases is quite rapid.
Source: State health websites
So far, the F-CAT states are kind of tracking pretty closely to NY tristate…
Here is what is interesting. The F-CAT states seem to be tracking NY tristate pretty closely. And if this is true, we could see a crushing 75% decline in cases with two weeks.
– We are already >7D past the peak and by day 25, we should be down -75%
Source: State health websites
The reason F-CAT could see a crushing decline is that case prevalence in these states already matches the NY tristate area. Thus, if the case prevalence was equivalently high, we should see the infection reach its potential break point.
Source: COVID-19 Tracking Project
POINT 3: The US and global economy is a mess, and remains a mess without a cure…
But the question of whether the US ever returns to “normal” is an open issue. The path of COVID-19 remains uncertain. And there remains a risk of a second wave at any time. And in the meantime, the US economy is still in the depths of its lows, but past the bottom.
A lot of Americans are behind on their rent…
CNBC had a great analysis today about how rent delinquencies are plotted across the US.
https://www.cnbc.com/2020/07/27/how-the-eviction-crisis-will-impact-each-state.html
As this chart shows, there are some states where nearly 50% of renters are behind their rent. These people risk eviction and of course, shows vulnerability. Unless employment recovers, these Americans are going to be dependent on fiscal interventions.
https://www.cnbc.com/2020/07/27/how-the-eviction-crisis-will-impact-each-state.html
Professional sports remain vulnerable to disruption by outbreaks…
The Miami Marlins opener against Baltimore Orioles was postponed due to an outbreak of COVID-19 among the Marlins (a total of 14 players). This resulted in delays for two more games. Thus, without a cure, professional sports face a daisy chain of disruption. And this is going to be prevalent throughout the economy.
https://www.espn.com/mlb/story/_/id/29546814/sources-marlins-cancel-game-virus-spreads
