(COVID-19 remains a global crisis and we realize that many people need to keep up with COVID-19 developments, particularly since we are moving into the more critical stage (“restart economy”), so feel free to share our commentary with anyone who has interest.)
We received incrementally positive news Wednesday from Pfizer and BioNTech concerning a joint COVID-19 vaccine effort. Their first clinical trial shows positive results and specifically, those receiving this vaccine showed high levels of neutralizing antibodies (1.8-2.8X that of recovered patients).
This adds to the Dr. Anthony Fauci’s belief that some type of commercial vaccine will be available in early 2021. If this is the case, the pathway to putting COVID-19 behind is visible. Another positive is that President Donald Trump publicly supported the use of masks, deflating it as a political issue.
Looking at the next 6 months (2H2020), we see equity markets in the hands of buyers for the following reasons: total infection rate in the US likely has peaked; the new epicenter states, FL, AZ, CA, TX, (F-CAT) are course correcting and potentially <2 weeks from peak; there are >11 states which show the economy can be opened safely including NY, NJ, CT, etc.; Europe is also showing opening the economy can be done safely; vaccine/cure potentially within 6-9 months and is a massive binary event; and US economy is past the bottom.
Emerging from the worst depression in 5 lifetimes, US surviving companies are unkillable, I think. When Purchasing Manager Indexes (PMIs) turn back above 50 (see table), stocks rally strongly, but the stronger is cyclicals. And Thursday came the news from the Labor Department that the country gained 4.8 million jobs in June (vs. 2.9 million expectation), dropping the unemployment rate to 11.1% from 13.3% in May.
I believe the US economy has bottomed and is gradually expanding. Additionally, the June ISM came in with a sizable beat at 52.6 vs Street’s expectation of 49.8 and vs. 43.1 last month. The US is now officially back in economic expansion. The June ISM is the best reading for all of 2020. Since 1949, when PMIs move back >50, cyclicals and value sectors lead. In the past 25 years, Value beat Growth, although by a narrow margin.
Thus, given the consensus underweighting of epicenter/cyclical stocks and their tendency to outperform when PMIs>50, I think this is the correct focus on 2H2020.
POINT #1: Total USA cases surged to a new high with 52,774 cases and the biggest driver of this increase is CA, which ordered indoor businesses to close. The surge is centered in the known hot spots for CA, such as LA county. The narrative for COVID-19 cases are largely the same. Cases have surged in the past few weeks and this is driven by 3 factors: nationwide protests causing superspreader events; imported cases from Mexico and Latin America; and greater mobility as the economy has opened
So far, total hospitalizations and deaths are not tracking this surge in detected cases. Importantly, total deaths continue to be quite muted compared to the rise in cases. This is ultimately the metric that would validate this surge in cases is leading to a worsening healthcare crisis. This is not the case at the moment.
POINT #2: The epicenter of the COVID-19 crisis is now 4 states, Florida, California, Arizona, Texas (F-CAT). There are more daily cases from these 4 states than the other 46 combined. I realize COVID-19 is highly unpredictable, but Houston daily cases are 70% off their recent highs, and Miami daily cases are nearly 50% off their recent highs. There is a lot of uncertainty around this disease spread, but we also know that these states are already “course correcting.” Broadly, these cities within the “nucleus” counties of F-CAT are the last major large cities to see an outbreak. Hence, when these states contain COVID-19, the US should again see progress.
POINT #3: COVID-19 DECLINING per Institute for Health and Metrics and Evaluation (IHME) — “daily infections” down 72% to 73k/day from 260K/day at peak in late March. Dr. Scott Gottlieb, former FDA Commissioner, has said that the US is likely only detecting 1 in 10 new COVID-19 infections per day. This distinguishes “infections” vs “cases” with infections referring to someone COVID-19 positive while cases are someone with symptoms.
But this is an interesting point, as the detection rate is better today but there are still 10X as many cases out there. This suggests the R0 calculations may not be correct (rate each infection spreads to another) and hospitalization and death rates are far lower by a factor of 10 (divide these rates by 90%). The IHME model actually suggests COVID-19 is slowing in the US, even as “confirmed” cases rise and that “infections” peaked on 3/29/2020 at ~260K and down to ~73K today, down 72%. If infections are the real metric, and infections are falling, this means COVID-19 is actually on the decline in the US. Think about that for a moment.
Bottom line: I believe equity markets are still in the hands of buyers. While many remain skeptical of the economic recovery, due in part to the apparent risks on the healthcare side, we believe infection rates are actually suggesting while COVID-19 is spreading, it is doing so at a reduced pace. The positive course corrections in the new epicenter, FL, CA, AZ, TX, or F-CAT, will help mitigate this spread.
Figure Comparative matrix of risk/reward drivers in 2020
Per Fundstrat
Figure: Fundstrat Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019