Click HERE to access the FSInsight COVID-19 Daily Chartbook.
In markets, investors often say “early is wrong.”
COVID-19 cases have definitely peaked. Using today’s data (from tireless ken), the 7D delta is -15,492. This is a massive acceleration to the downside.
But as we discuss below, when cases peaked in late April, it took 20 days before the epicenter stocks started their massive 3,000bp outperformance rally (over 10 days). If cases peaked July 24th (which it looks definitive), the 20th day is August 14th.
Source: COVID-19 Tracking Project
So if history is an analog, next week is the week we could see a monstrous rally in epicenter stocks.
STRATEGY: Epicenter outperformance started May 13th, 20 days after the daily cases peaked.
We want to revisit something we flagged back in March. Since 1920, every stock market decline >35% saw a symmetric price recovery. In other words, the faster the markets fall, the faster the markets recover, and the ratio is 2.5X. Given the speed of 2020, this implied making new highs before the end of the Summer.
– Like the precedent 9 declines, this 10th decline and recovery has been textbook.
– We are a stone’s throw from making new all-time highs.
We understand the arguments a lot of investors make that stocks are “too expensive” and we wrote about how there are two arguments for why stocks are still reasonably priced. In fact, I know many investors also do not like stocks moving up in a straight line (neither do we) and this surge is no doubt making investors worried about a correction.
– But as the investor legend, Peter Lynch, once said, more money is lost anticipating a correction than in the correction itself.
If I had to amend this, it also applies to anticipating rotations. We have been too early in calling for this rotation into epicenter stocks, because even as daily cases are turning, investors are still not convinced.
But part of the reason we did not mind being early, is that we saw a binary outcome from a vaccine/cure. In fact, in many of our commentaries, we note that we believe this would be a violent rotation. Today, Goldman Sachs’ investment strategy team is making the same argument. This was widely reported in the media, including CNBC and Bloomberg.
https://www.bloomberg.com/news/articles/2020-08-06/goldman-says-time-to-think-about-a-shift-in-market-leadership?sref=NVS0rEaE
Epicenter stocks did not start leading until 5/13, which is 20 days after COVID-19 peaked 4/24
We have plotted COVID-19 daily cases (as compiled by tireless Ken) and the relative price performance of epicenter stocks. The shaded pink areas are the two times since March 2020 where Epicenter stocks were leading.
The more critical period, in my view, is the 28 days from 5/13 to 6/9, where epicenter stocks outperformed the S&P 500 by almost 3,000bp.
– Daily USA cases peaked on 4/24/2020
– Epicenter stocks initially rallied post that peak, but that rally failed
– It was not until 20 days post peak that epicenter stocks started to rally
Source: Fundstrat
If the same “20-day delay” applies, next week is when we could see epicenter stocks rally…
Daily USA cases peaked on 7/24. 20 days from 7/24 is 8/14, or next week.
– so if this same analog applies, we could see the epicenter rally to gain traction next week
– it coincides with “decisive” evidence that a peak is behind us and that the trend is established
We think investors are generally chastened, because of the fits and starts and the stumbles. So, there is a natural skepticism. But as we commented previously, a cure/vaccine would create a binary event.
Stock and bond valuations likely to converge, or mean revert = equity P/E going WAY UP
As for valuation, we talked about how stocks, as bond proxies, are ridiculously cheap compared to comparable corporate bonds and especially against government bonds. By the way, Google is now financing at rates better than most US states and nearing the rate of the US government.
But two comparable we want to highlight are:
– S&P 500 P/E 20X vs investment grade bond P/E of 53X
– Epicenter P/E of 15X vs high-yield bond P/E of 19X
The equity is a superior valuation, because EPS is growing and the implied of bonds is much higher. Thus, our argument is that bonds will “stand still” and stock’s P/E will re-rate higher.
Source: Fundstrat
History is on our side. Take a look at the comparing bond yield of IG (investment grade) and the earnings yield of S&P 500 (1/PE).
– From 1980 to 2008, the EY of equities was LOWER than IG bonds (means equity P/E higher). 30 years
– From 2008 to 2019, the EY of bonds was LOWER than equities, but this reflects skepticism of stocks post-GFC, 11 years.
We believe we are going to see this relationship revert again. So EY of equity will fall below the EY of bonds. This is achieved by the equity P/E rising.
Source: Fundstrat
20 stocks meeting the trifecta…
We have updated our trifecta list. These are stocks OW ranked by:
– Brian Rauscher, Global Portfolio Strategist
– Rob Sluymer, Head of Technical Strategy
– DQM ranked quintile 1 by Ken Xuan quant model
Source: Fundstrat
POINT 1: Daily cases are collapsing.
Daily COVID-19 cases came in at 53,579 which is up +1,279 vs 1D ago, but this is the typical midweek seasonality. When compared to 7D ago, daily cases are down -15,492.
– Daily cases are collapsing.
– As we wrote yesterday, this collapse in daily cases is far higher than April/May
Source: COVID-19 Tracking Project
It is pretty evident looking at the 4 states that have been the epicenter since this recent surge — FL, CA, AZ, TX, or F-CAT.
– in 4 of 4 states, the daily cases are rolling over — big time
Source: COVID-19 Tracking Project
6 states reported sizable 1D increase
Florida 7,650 vs 5,409 (1D) +2,241
Alabama 1,938 vs 952 +986
North Carolina 1,979 vs 1,127 +852
Tennessee 2,252 vs 1,657 +595
Indiana 1,040 vs 720 +320
Minnesota 861 vs 617 +244
Total +5,238
6 states had a sizable 1D decline
Texas 7,598 vs 8,706 (1D) -1,108
Georgia 3,182 vs 3,765 -583
Mississippi 956 vs 1,245 -289
Oklahoma 837 vs 1,101 -264
Arizona 1,444 vs 1,698 -254
Massachusetts 231 vs 440 -209
Total -2,707
Source: COVID-19 Tracking Project
POINT 2: States with the highest daily cases are now seeing the biggest decline (vs 7D ago)
We have talked about a broad-based retreat in COVID-19 cases, and it is coming from the hardest-hit states. That is, this decline in cases is coming from:
– States previously with the highest daily cases (ala 4 states were the epicenter, FL, CA, AZ, TX, or F-CAT)
– States with highest cases per 1mm residents are seeing the biggest 7D decline (akin to infection break point/herd immunity)
To appreciate this point, take a look at our comparable tables below. This is slide 3 in our Chartbook, which we attach to our BLAST commentary each day.
States with the highest number of daily cases are seeing the biggest 7D declines…
Take a look at the states reporting the highest number of cases, we highlight the 15 below.
– these 15 states account for 75% of the daily reported cases
– these 15 states now account for most of the 7D decline in cases
The virus is retreating from the hardest-hit states, reflected in the steep downturn in daily cases vs 7D ago.
Source: Fundstrat and State Health websites
In other words, this is suggesting that there is a collective reversal of trend taking place. Across all states, cases are slowing, and this reflects the combination of increased mask compliance, better social distance efforts and states rolling back some easing. But collectively, the virus is slowing.
This is actually quite positive. And this is a contrast with the mainstream narrative that COVID-19 is spreading to new states and causing more outbreaks. If we look at which states are reporting the largest 7D increase in daily cases, they are at the bottom of the US states (in terms of daily cases). Take a look at the table below:
– the states seeing a rise in cases have seen very little COVID-19 at all.
– the two that stand out –> Hawaii and US Virgin Islands.
Source: Fundstrat and State Health websites
This chart, from slide 3 of our chartbook, shows a heatmap of where daily cases are rising, based upon 7D delta. Geographically, this is taking place in the middle of the US.
– GA, KS, OK, IL, CO and
– other states like UT, IN, IA
Source: Fundstrat and State Health Dept websites
POINT 3: Which habits “die hard”– these will come back with a vengeance…
There is going to be a lot of discussions, going forward, about how many consumer COVID-19 driven behavioral changes prove to be permanent versus temporary. And it is obvious to say, this has major implications for investment strategy.
This Bloomberg article caught my attention, written by Nathaniel Bullard. It talks about how Americans and actual global citizens are buying SUVs in ever growing numbers. Think back to post-GFC (2009), many experts, including automobile industry analysts, had talked about the death of auto sales and even more so, SUVs, stemming from high oil prices and from the economic collapse.
https://www.bloomberg.com/news/articles/2020-08-06/giant-american-cars-don-t-belong-on-the-streets-of-the-future?sref=NVS0rEaE
But the opposite happened. As this chart below highlights, SUV share of total sales is now approaching 75% of all passenger vehicle sales, up from 50% in the mid-2000s. So instead of seeing the death of SUVs, this trend, which was entrenched over decades and generations, kept moving forward.
https://www.bloomberg.com/news/articles/2020-08-06/giant-american-cars-don-t-belong-on-the-streets-of-the-future?sref=NVS0rEaE
This study by McKinsey got us thinking about which of industries heavily impacted by social distance will recover. The ones that recover are the ones that will be proved to be the best epicenter stock ideas. We do not have a crystal ball. But, in our view, the endurance of consumer behavioral changes will be based on several factors:
– is this behavior institutionalized, either by time (generations) or by supporting infrastructure
– how much is future safety going to be an issue?
– are there alternatives to this?
https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-great-consumer-shift-ten-charts-that-show-how-us-shopping-behavior-is-changing?cid=other-eml-alt-mip-mck&hlkid=69d8f7161c9948ec858d7df0bdd7dbfb&hctky=9489327&hdpid=53369599-0702-4df1-a824-310b2d7c65cb
We made a list below and this is based only on a simple checklist. This is just a framework and hope you will develop your own framework. But if we used this simple checklist, this is what we see as consumer activities and their substitution.
Once a vaccine/cure happens, these come back strong
– Airline travel
– Cruise lines
– Casinos
– Hotels and resorts
– Concerts
– Professional sports
– Theme parks
– Bars
Consumers making semi-permanent changes
– Leave urban living
– Move to suburbs
– More RVs and road trips
– Outdoor activities
– Cooking (maybe)
Unclear if these activities recover as strongly– Gyms/fitness centers
– “Experience” restaurants, more are cooking and more are ordering in
– Retail shopping (much of it has successfully moved online)
– less commuting (businesses built around supporting commuting)
The bar is raised for Americans. The McKinsey survey also showed that “safety” is going to hold Americans back. In fact, 28% will not resume some activities until medical authorities deem them safe. Thus, we are more dependent than ever on medical experts.
