COVID-19 Case Trends Remain Positive; Market Reaches ATH
This has been a very good week for US COVID-19 case data. After all, the case figures this week cement that the trend is downwards for organic case growth. But we also think that markets will start to shift their thinking about COVID-19 from “change in cases” to “level of cases.” That is, it will start to focus more on the question of “when is COVID-19 under control” in the US.
The benchmark many cite is a positivity rate <10%, but the current rate is 6.5% and it does not seem like COVID-19 is under control. I think a better measure is daily cases per 1mm residents, which is currently ~120 per 1mm (40,000 per day). Europe did not open until daily cases fell to 30-50 per 1mm, which in the US is equivalent to 9,900-16,500 total daily cases. Cases need to fall another 60% from here. At this pace of change, we could be there in a few weeks.
After achieving an all-time high this week, equity markets are, not surprisingly, consolidating gains. Washington continues to be in the spotlight, stemming from the Democratic National Convention taking place this week (nominating convention for Dems, for our global clients) and the continued impasse with Washington. I expect this impasse to be resolved and a new stimulus package to be approved in the coming days/weeks, which should add further relief.
Strategy: I expect a rebound in the “epicenter” stocks which are poised to outperform as the market reaches new all-time highs. The quilt below shows the trailing performance (7D relative to S&P 500) of 4 cohorts driving the S&P 500: FANG, Growth, Defensives and Epicenter.
If I had to point to the primary drivers behind this weakening outperformance, three issues seem to come to the forefront:
– First, the US economy seems “stuck in neutral” because Americans are still worried about COVID-19 (correctly).
– Second, Europe is seeing a resurgence of cases, so there is this “second wave” fear, especially with back to school and flu season in US.
– Third, Washington is still dawdling on a CARES Phase 4, and DNC this week is only highlighting how contested 2020 elections will be.
There is fear that the progress in US cases is only temporary and will soon worsen in the Fall. However, given the mitigation steps taken by local policymakers and citizens, we are seeing a rapid organic retreat in cases. The trend in US cases relative to its peak is positive. But this is a “change measure” and we can measure how many counties (based on population) are seeing cases 50% and 75% off their peaks.
– Counties with cases 50% off their peak is at a new high, surpassing even what we see in April/May.
– Counties with cases 75% off their peak is up to ~30% and steadily rising.
Source: Johns Hopkins So, there is a clearly established improvement trend where US cases are falling away from their peak.
Bottom Line: As positive case data comes in and the CARES Phase 4 stimulus package progresses, the market sees continuing tailwinds to push it to new all-time highs.
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
More from the author
Articles Read 1/2
🎁 Unlock 1 extra article by joining our Community!
Stay up to date with the latest articles. You’ll even get special recommendations weekly.
Already have an account? Sign In 51ba5f-1d51a1-523983-8367b8-12cefb
Already have an account? Sign In 51ba5f-1d51a1-523983-8367b8-12cefb
