From a healthcare timeline, the past three days have been the worst since early March. We’ve seen back to back record surge in cases, Texas “pause” its opening, Disney delay indefinitely its opening of Disneyland, and Apple close more retail stores. This is just horrific. Moreover, there’s not been any news this week on the healthcare side. And the 2020 election race is becoming tighter and tighter.
In the face of this, we have seen a 3% decline in equities last week despite the awful news, and the VIX barely budged. If this happened two months ago, we would be expecting the SPX to visit 1,700 or lower. I think this reflects the real positioning of the market. Investors have little need to sell because few investors are “uncomfortably” long. The best sentiment metric to track >age 60 investors is the AAII survey, where currently the AAII bulls less bears is -25%, 3rd worst reading since the great crash of 2020.
Retail investors, age >60, are as bearish now as they were when COVID-19 was burning down NYC. If investors are already bearish and sitting on record cash, downside moves are just not that dynamic. Now, I think a consolidation is healthy. I am not trying to say stocks have to surge from here. But this is not much downside given how the “headlines” have not been great for COVID-19.
Additionally, case figures matter less than deaths and hospitalizations. Looking at recorded deaths, there is not any resurgence of any kind. Cases are exploding but hospitalizations are more benign, and deaths trending lower.
Strategy: Stick with “Epicenter” even because they are “unkillable.” In face of this setback on cases, the natural question is whether we want to be buying “Epicenter” stocks (see below). If states pause/rollback, this group is hit the hardest. In short, I think the right strategy is Epicenter.
Here is a simple observation. We’ve seen “massacre-level” bad news. And the Epicenter got massacred. But will they get pounded even more? They are hardly owned today. And the fact that the NASDAQ made a new all-time high shows its secular growth attributes makes it a kind of safe haven “bond proxy” (NASDAQ is the new bond proxy?) So, the upside in the S&P 500 is the cyclicals, aka Epicenter.
We are updating our “trifecta” epicenter stock lists. These are stocks which: are DQM ranked top quintile; Rob Sluymer rates OW technically; and Brian Rauscher OW on his model. New Long ideas: Discretionary: GNTX, BBY, GRMN, TPX, DHI, LEN, EBAY, DRI (New); Energy: CVX, XOM, COP, PXD; Financials: GS, MS, SBNY, SIVB, EQH (New); Industrials: GD, ALK, FBHS, MAS, CMI, OSK, ITT, GWW, MSM, SNDR, HWM (New).
POINT #1: Daily COVID-19 cases rose to 39,020, +725 Thursday from Wednesday. FLA, CA, AZ and TX leading US surge, and imported cases could be a factor. This is not a second wave, but it is a wave of severity as these cases are driving renewed concerns about the economic recovery.
More doctors and healthcare professionals are urging that the mindset of case numbers may be less important than the severity of illness. The picture on hospitalizations is not as dire as the case rise. The trends are not “falling” but they are certainly better than the case data. Ultimately, I think healthcare burden is going to matter more. The linkage between cases and hospitalizations has changed since May.
Daily death trends have also been encouraging, generally drifting lower. And we can see that even daily deaths in FLA, CA, AZ and TX have not been rising as quickly as cases have.
POINT #2: Texas course correcting by “pause” encouraging and not a shutdown. This is a very healthy and needed course correction. The state is largely open and, in fact, the pause essentially does two things: limit capacity on what is open at restaurants, bars and amusement parks and freezes elective surgery.
POINT #3: Latino share of cases surging. We have written about the surprisingly high share of COVID-19 cases that are Latino/Hispanic in the US. The overall share of the Latino/Hispanic population is 17%, but data gathered by our data science team, led by tireless Ken, shows that Latinos are 42% share of cases.
Overall, 39 of the 50 states have “excess shares” of cases by Hispanics vs Hispanic percentage of population: TN 39% cases vs 6% of pop; AK, 30% vs 8%; NC, 42% vs 10%; GA 30% vs 10%; and SC, 20% vs 6%. (Texas is not included here because the state made a big reclassification in the past week, so this will be “clean” by next week.)
Why is there excess share? There are multiple explanations but I am not sure. The New York Times ran a story that said this may be a function of two factors: Multi-generational living, and less accessibility to healthcare. The US has significant inbound travel from Latin America. The International Trade Association shows 18.7 million Mexicans have visited the US in the past year (2016 data) and there is substantial inbound travel from other Latin American countries from April to July.
This impacts US COVID-19 cases because Latin America is now the center of the COVID-19 crisis, with more cases from here than anywhere else. Daily cases there continue to soar and look particularly parabolic in Mexico, Argentina and Brazil, which, incidentally, have many visitors to the US. But we do not know the exact share of cases stemming from this overflow.
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
