COVID-19 Daily Cases, Hospitalizations, Deaths Rolling Over
As we close out the week, the best development I see is the recent sustained downturn in COVID-19 cases in the US. This decline (7D delta) is even faster than the retreat seen in April/May after this initial surge. Thus, it seems like COVID-19 cases are improving at a faster pace.
Overall, this affirms my view that the June-July surge in COVID-19 cases plateaued in late July. If this is a textbook peak, similar to what was seen in NY tristate, we could see crushing declines in coming weeks. Across all states, cases are slowing and this reflects the combination of increased mask compliance, better social distance efforts.
This is quite positive and is in contrast to the mainstream narrative that COVID-19 is spreading to new states and causing more outbreaks. If we look at which states are reporting the largest 7D increase in daily cases, they are at the bottom of the US states (in terms of daily cases). And, if we look at the states with the highest number of daily cases, they are seeing the biggest 7D declines.
Another piece of good news is that hospitalizations are down ~6,500 from their peak two weeks ago (7/23). So, cases have plateaued and while many expect deaths to soar, hospitalizations trending down means fewer infected require hospitalizations.
The way I see it there is now a convergence of 3 positive factors: daily cases, hospitalizations, and deaths are all rolling over. There will be other things to worry about– school, flu season, etc. but for the time being these positive factors are supportive for equity markets.
POINT #1: If “20-day delay” applies, next week is when epicenter stocks could rally…
The relationship between COVID-19 daily cases and the relative price performance of epicenter stocks is worth watching. The shaded pink areas on the chart to the left represent the two times since March 2020 where Epicenter stocks were leading the broader stock market.
The more critical period, in my view, is the 28 days from 5/13 to 6/9, where epicenter stocks outperformed the S&P 500 by almost 3,000bp. Daily USA cases peaked on 4/24/2020 and despite a small interim rally, it was not until 20 days post peak that epicenter stocks posted a sustained rally.
Applying that same logic to the most recent peak, daily USA cases peaked on 7/24. And 20 days from 7/24 is 8/14, or next week.
If this same analog applies, we could see the epicenter rally gain traction next week. This coincides with “decisive” evidence that a peak is behind us and that the trend is established.
As I have commented previously, a cure/vaccine would be a binary event and would likely result in a violent rotation towards epicenter stocks.
POINT #2: Stock and bond valuations likely convergence implies P/E going WAY UP
While I understand the arguments a lot of investors make that stocks are “too expensive”, as bond proxies they are ridiculously cheap: compared to both corporate bonds and especially compared to government bonds. The P/E on the S&P 500 is currently around 20x and the implied P/E on US investment grade bonds is >50x. (By the way, just to give you a sense of how low yields are, Google is now financing at rates better than most US states and nearing the rate of the US government). Comparing bond yields of investment grade bonds (IG) and the earnings yield (EY) of S&P 500 (1/PE), it is worth noting their historical relationship:
– From 1980 to 2008, the EY of equities was LOWER than IG bonds (means equity P/E higher). This period persisted for 30 years
– From 2008 to 2019, the EY of bonds was LOWER than equities, but it is important to note that this reflects skepticism of stocks post-GFC. This period persisted for 11 years.
So, for the greater portion of the past 40 years the EY of equities was lower than that of IG bonds. And, we believe we are going to see this relationship revert again. This is achieved by the equity P/E rising.
Bottom Line: If stocks follow a similar “20-day delay” pattern, we could see epicenter stocks rally next week.
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
