This week saw progress in the US on two fronts: first in healthcare (potential vaccine being developed by Moderna (MRNA) and others) and steps forward to re-open the US economy. However, a return to normalcy is more than retail openings and outdoor dining; it is as much about sports, traveling, business travel and entertainment. There will be a short-term cost to meet new compliance, and procedures initially will seem inconvenient. Over time they likely will become part of the new normal.
Daily case growth has been stubbornly flat. While there will be concerns about a second wave (which has not been evident in any nation or region opening), the consensus among health experts is that such a potential wave is probably more likely when flu season returns in the US (late Fall). More below. Nevertheless, this is progress, and perhaps better than many imagined in early March. But COVID-19 is not necessarily fading around the rest of the world, as global daily case counts are still elevated.
POINT #1: In the US, case numbers have stayed stubbornly high. Granted, part of this is an increase in testing which was >430,000 Thursday (annualizes to 150 mln tests), but it also says that prevalence in the US is just lingering. I wonder if it is realistic to expect cases to fall to zero in the US? High testing is good, but this level of testing is not really higher than Italy and COVID-19 has fallen much faster there than in the US.
NYC finally announced plans to open, by early June, slightly earlier than previous conditional comments by NYC Mayor Bill DeBlasio. NYC residents have already been increasingly venturing outside but there are real practical issues to be dealt with regarding meeting the standards of screening, sanitization and also keeping a minimal distance. So, it will be up to the ingenuity of business owners to make this happen.
Still, NYC case figures have fallen >80% from peaks. At some point, we have to wonder if NYC might simply be COVID-19 saturated. For example, some areas have a prevalence over 40%. One has to wonder if these areas have herd immunity.
POINT #2: Return to “normalcy” — Orange County approved opening plans for Universal Orlando in early June. This will be a daunting task. Universal said it will use plans based on screening, sanitization, and spacing, such as likely taking guest temperatures at all entrances and employees and visitors will be required to wear masks.
POINT #3: US is no longer the global COVID-19 epicenter, with the American case share down to ~23% from >40% on April 6. Unfortunately COVID-19 is not fading across the world. It is just proliferating in new regions. Given the US was the epicenter and all the knowledge about containment measures, it would make sense to expect other nations to fare better.
But this is not the case, as total global COVID-19 cases have been essentially flat since 4/12/2020 (98,758 worldwide) compared to 99.285 most recently. Cases are declining in Asia, Europe and North America, but it is a growing story in Latin America, Middle East and Russia. Regions seeing high case growth, measured as “daily new cases per 1mm residents,” are the Middle East and Latin America.
In the meantime, this does suggest to me that regional health security means nations will be reluctant to fully open borders. This will restrict the movement of people around the world. But will only make the US more prepared for any possible resurgence of COVID-19 in the Fall.
STRATEGY: The most recent BofA Fund Manager Survey (see nearby chart) shows high risk aversion, affirming the mountain of cash and risk appetite on the sidelines. For those not familiar, this is a great survey with 200 hedge funds and institutions participating. In the decade I have followed this survey, it has generally been accurate in positioning and tactically informative, that is, contrarian at the extreme readings, which is where we seem to be now.
The May survey showed: Cash and Healthcare are the two most overweight (OW) trades with 1.6 and 2.5 std deviations, respectively, while Energy and Equities are the most underweight (UW) trades at -2.2 and -1.8 std deviations. I would interpret this as the plurality of survey respondents view the +30% eight-week gain in stocks since March as a “bear market” rally, hence the high levels of cash, low equity exposure and UW in Energy.
In fact, the distribution of answers regarding the shape of the recovery (markets) is: a net 75% see a U or W-shaped economic recovery (diffusion); a net 68% view the equity gains as a “bear market” rally; and a net 10% see a V-shaped recovery
Take the survey results, add in the lingering bearishness seen in AAII Retail surveys, and the $5 trillion or so in money market cash, and this tells me the ultimate contrarian bet is there is a new bull market underway. The scenario in March was dire, so investors raised cash, as did consumers from banks. If the circumstances led the world to the point of taking cash from banks, one can hardly expect this perception to have faded by May, less than 3 months later.
Opportunity in the epicenter stocks…
As I have noted in past comments, the growth stocks have already retraced much of the March decline. But the “epicenter” stocks have remained well below their February levels. So the market has not become optimistic about stocks at the center of this crisis: consumer discretionary, energy, industrial and financials. Remember, that the epi-center stocks are 27% of the market cap but are 66% of the points upside, if all stocks retrace to their Feb. highs.
The bottom line: I think the risk/reward is best in the epicenter.
Figure: Comparative matrix of risk/reward drivers in 2020
Per FS Insight
Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019
