Equity markets were choppy over the past week. And while impacted by the stalemate in Washington over the fiscal stimulus and the surging COVID-19 cases in Europe and the US, the Standard and Poor’s Index finished the week essentially flat; up 0.2%.
Unfortunately, COVID-19 is spreading at a faster rate in the US. While cases are spreading in nearly every state, this surge since early September is being driven by a new set of about 20 states. Wave 1 was NY tristate, wave 2 was FL, CA, AZ, TX, or F-CAT, and as the chart below shows, these other 20 or so states are driving wave 3.
Daily cases are spreading at such a high-speed in these states to hopefully cause their residents to take appropriate action. Similar to wave 1 and wave 2, I think it’s possible that we see this third wave peak within the next 2 weeks. And if these states avoid a shutdown, this would be good news.
Nevertheless, it was not all bad news on the COVID-19 front this week. The severity of this wave of cases seems less lethal than prior waves with the US seeing 1% incremental hospitalizations vs 4% in July. And over the next 20 days, equity markets are primarily focused on Washington (election and fiscal stimulus) and the path of COVID-19. Importantly, the
daily change in COVID-19 cases vs 7D ago has not shown an exponential rise, which I see as a positive.
Source: COVID-19 Tracking Project This week, we looked at the “peak speed” of COVID-19 spread on a state by state basis. Similar to waves 1 and 2, this recent spread also seems to have what I call a built-in “speed governor,” in the sense that once cases reach a certain level of spread, there is a policy response as well as behavioral changes that mitigate further spread.
A simple example of this is the many anecdotes we received from those in Texas. Once COVID-19 reached a certain level of spread, many Texans donned masks and practiced other mitigation measures. On a state by state basis, we are seeing different levels of “peak daily cases per 1mm” and will be watching this closely. I expect these “peak” levels on a state by state basis to provide insight into the overall trajectory of this third wave
Strategy: 3Q2020 EPS season affirming we are moving past the bottom on EPS.
A simple guide to seeing this is to look at the relationship between ISM exports and EPS growth. As can be seen in the chart below, when ISM exports recover back above 50, this coincides with a turning point for EPS. Hence, the run-rate for EPS is now positive quarter over quarter. And overall, this EPS recovery is far stronger than we expected, and US corporates are more “unkillable” than we expected. Previously, we expected 3Q2020 EPS to be similarly bad to 2Q2020, so this is better than our expectations.
Accordingly, we are raising our 2020 EPS estimate from $50 to $100. Decomposing this growth into sectors, more than 50% of this increase is driven by EPS growth from the epicenter sectors (Discretionary, Financials, Industrials, Energy, Materials). A little less than 50% of the increase will be driven by Secular Growth (Technology, Communication Services, Healthcare) with little growth being driven by defensive sectors. We are keeping our 2021 EPS estimate at $193.
Source: FSInsight, Bloomberg, ISM This week we re-balanced our “Granny Shots” portfolio adding five new stocks and removing six stocks. On a year to date basis, the granny shots portfolio is outperforming the S&P 500 by 25.4%. We continue to view Granny Shots as a way to construct a core portfolio as these stocks fall within our three thematic portfolios and three tactical portfolios and encourage you to refer to the updated list on page 1.
Bottom Line: The choppiness in equity markets over the last week is understandable given the focus on election outcomes, fiscal stimulus and rising COVID-19 cases. Nevertheless, I think stocks have made their pre-election lows and am encouraged by 3Q2020 earnings results.
Figure Comparative matrix of risk/reward drivers in 2020
Per FSInsight
Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019
