In the past week, US daily coronavirus (COVID-19) cases surged to record highs, 500,000 per week, yet stocks are holding up. In early June, daily US caseload was about 18,000 but it is about to surpass 70,000, a nearly 4X increase. This surge has caused states to pause and even rollback easing of the economy. If you are confused, I can think of a few reasons why equities have managed to rise in the face of this:
– Markets are distinguishing between infection rates and “confirmed cases” and the surge reported in the past month is due to better detection (testing).
– Markets are focusing on severe outcomes, deaths and hospitalizations, and these have largely diverged from cases;
– Markets are focusing on the rapid progress of vaccines/ cures and believe these surges now do not represent a new baseline;
–Markets saw how NYC/ NY tristate experienced its outbreak and sees the new epicenter, FL, CA, AZ, TX, or F-CAT, following this path.
Nevertheless, the US has dropped the ball on COVID-19. Instead of a glide path of declining cases and contained outbreaks, COVID-19 is spreading in the US at an uncontained rate.
As I see it, the root causes (listed below) are not really due to “economic opening.” Instead, I believe they are tangentially connected to movement: poor mitigation such as “no masks” or not maintaining social distance practices; imported cases from Mexico (Southern states), and political protests nationwide protests ongoing for 4 weeks = 10,000X super spreader events. There is a common thread: young people are propagating the pandemic. This is the key.
STRATEGY: There are tons of cash still on sidelines The retail investor’s surging interest in equity markets has been generally characterized as negative by financial professionals. But some of this probably stems from the fact that retail investors are realizing some impressive equity trading gains. 2020 has brought in a new type of retail investor. For example, Schwab opened 800k new accounts YTD; TD Ameritrade +691000 accounts YTD; and Robinhood >3 million new accounts opened YTD.
Remember, retail has been largely absent from equity markets for the past decade. Alpha is a zero-sum game, so the withdrawal of retail investors is one reason hedge funds performance weakened post-2009. Alpha is the “excess return” generated by a constituent relative to the overall return of the asset class. But the sum of the performance of all investors in that asset class is the “market return” — hence, aggregate alpha is zero.
The year is only half over, but statistics indicate that hedgies’ returns have trailed market gains. Moreover, hedge funds were “short” equities in June and early July. Thus, in a world of “zero aggregate” alpha, the retail investor likely captured alpha.
Note that the real source of retail net worth is the “Baby Boomer” generation, which controls 76% of the $98 trillion in US household net worth. (See chart page 1.) The Millennials, active on Robinhood, control just 5% of the total net worth of households. Baby Boomers matter and they have tons of “dry power, but they have been bearish in 2020, as shown in the 2020 negative AAII readings (AAII is mostly baby boomers).
This can be readily seen in the $400 million rise in retail money market cash balances. (Chart nearby.) While it has come down by $35b since May, more than 90% of the cash raised since the start of the year is still on the sidelines. Do you have to wonder why stocks seem to have a hard time falling on bad news?
POINT #1: Daily cases in the US broke above 70,000 for the first time ever, or nearly half a million Americans getting COVID-19 every 7 days. This is utterly astonishing. The good news is FL positivity rate is beginning to roll over from a peak of >25% 10 days ago to 15% today. 10% is the level that is considered “acceptable”
Daily deaths are up but the pace of increase is very mild relative to the surge in daily cases. There are many who are predicting deaths will rise dramatically. And that will be the test. I believe deaths have diverged from case growth but this could certainly change. The rate of case growth, daily change, compared to 7 days ago (“seasonality”) is higher than the past few days, but it kind of looks like a plateau. US testing is hitting nearly new highs today, surpassing 800k for the 2nd time ever.
POINT #2: After the parabolic spread of cases in F-CAT, it seems like the rate of growth of cases is finally slowing. CA and TX certainly could see surges, but the rate of change in the past 4 weeks seems to be flattening. These states took corrective measures, so this is not a case of states moving blindly forward.
Unfortunately, deaths are increasing at F-CAT states, to about 350 per day from 200 per day a month ago. This is a reminder that COVID-19 has deadly consequences, but the rate of increase is nowhere near as steep as what was seen in NY tristate during April. So, there is a positive divergence there.
POINT #3: The South Florida Sun-Sentinel reported that 1/3 of children tested (not clear if serology or PCR) were COVID-19 positive. This surprised me. According to their data, only 6% of total confirmed cases are under age 17. The article states children tend to be asymptomatic when they have COVID-19, or very mild symptoms.
Bottom Line: I think there remains a good risk/reward 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
