(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.)
Uncertainty about the path of COVID-19 worsened this week, as US overall cases rose to new highs and US deaths seemed to “step-up” to 800 per day (past 3 days) vs 500 or so a week ago. And the path of COVID-19 in the US has departed from Western Europe and Asia, both other regions seeing cases generally fall.
But these are not all entirely negative developments. Many states have taken significant actions, including mandating masks and thus, this surge is not growing without action. But I also cannot escape our general view that this surge has 3 factors: (i) nationwide protests created 10000X super spreader events; (ii) significant imported cases from Mexico and Latin America, explaining the surge in FL, CA, AZ, TX (or F-CAT) and the Southern States, generally and (iii) lax compliance with PPE, mitigation (etc.).
And on top of that, equity markets do not like “contested/close” elections. So, the tightening of the Presidential race is further fueling market hesitation. So there are just more building blocks for a wall of worry.
As I approach the weekend, there are two elements I am watching closely:
– F-CAT daily case trends, but TX, and Houston, in particular, as Houston is the “nucleus” of the TX surge. Houston, so far, peaked 17D ago.
– US daily deaths. Will the curious divergence continue? Or will deaths surge in the next week? If so, we should see a spike this weekend.
POINT #1: Daily cases near highs at +57,797, Houston cases -65% off peak 17D ago…
Well, the daily cases for COVID-19 remain elevated but at least we did not see a new high on Thursday. In fact, daily cases were down -5,156 from 1D ago. But the fact is, COVID-19 is still spreading in the US.
Houston cases peaked on 6/23 and have fallen 65% since. Think of Houston as NYC for NY. By the way, the county is the largest in the state of TX. And even San Antonio and Dallas have eased from their highs. The only relapse city (of the 4 major counties we are watching) is Austin.
Daily deaths are becoming the most important metric to watch, because up until this point, daily cases and deaths were diverging. But see below, we have now had 3 consecutive days of ~800 deaths per day.
– Is this daily death figure about to surge?
– This will be the weekend’s biggest question for me.
STRATEGY: US Cyclicals “pause” but somehow China did not get the memo…
As visibility and confidence in the US pandemic recovery has faltered, so has the “epicenter” trade (Cyclicals). We have written about this pretty every day this week.
– A good proxy for the “epicenter” trade is the S&P High Beta ETF (SPHB). It is heavily cyclical and is pretty much a snapshot of the Value Index. Heavily Financials, Discretionary, Energy and Industrials and Tech, even.
– China’s equity market had a nice breakout this week. This was well covered in the media and even China officials seem to be encouraging this. It is not without justification. China’s economy has staged a pretty impressive rebound. – But 10 days ago, we are now seeing a massive divergence.
– It looks like the “cyclical” trade is alive and well, but somehow it is playing out in China.
I think this is another reason not to get too negative on the “epicenter” trade. I note that this is a tough call given the worsening COVID-19 trends in the US.
Bottom Line: I think there remains a good risk/reward in the epicenter. Daily deaths are becoming the most important metric to watch and this weekend’s results could provide insight into whether or not we will see a spike next week.
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
