So far, this week is shaping up to look a lot like last week. We received positive news on a COVID vaccine early Monday morning (just like last week), followed by some euphoria and the abandoning of tech-heavy COVID darlings in favor of “value” names (just like last week), only for the markets to flip and give back some of the euphoric gains mid-week as COVID cases are on the rise (just like last week). Here are some of our thoughts to consider:
1. Rotation to Value? Just when it appears that tech stocks associated with shutdowns are down for the count, they come roaring back, as has been the pattern the last two weeks. Yet, across the various sectors, “value” stocks are out-performing “growth” and momentum names over the last four weeks. The Russell 1000 Value Index is down 2.1% year-to-date, while the Russell 1000 Growth Index is up 30%. This has been the case during the COVID-laden recovery. But, over the past 3 months, the Value Index is up 9.02% compared to the Growth Index up only 5.32%. It’s slightly more pronounced over the past 30 days as the Value Index is up 12.15% while the Growth Index is up 8.24%. There are some headwinds ahead to delay the full rotation as COVID cases continue to rise. For now, it’s probably two steps forward, one step backward as we proceed toward a full rotation to value.
2. Fundamentals Still Strong. Though Weekly Jobless Claims came in higher-than-expected yesterday, most of the other economic releases have been very strong this week. That tells you that the markets are being driven by emotion and future expectations right now and not the fundamentals. Weekly Jobless Claims were 742,000 for the week versus 705,000 expected. However, the two states with the largest increases – California & Washington – are two of the states with recent lockdown measures announced. Industrial Production, on the other hand, rebounded in October (+1.1%) from a negative posting in September (-0.6%). Retail Sales slightly disappointed (+0.3% for October vs +0.5% expected). However, October can often post a disappointing number as consumers prepare for a ramp up in spending for the holiday season in November and December. We’ll have to wait for November’s number before making any serious judgements on October’s number. Home Builders, Housing Starts, and Existing Home Sales all exceeded expectations as Real Estate continues to shine. Housing Starts not only exceeded expectations, but September’s reading was revised upward from 1.415 million to 1.459 million. If we dig into the data, Housing Starts for Single-family units are now up 14% over February of this year (v-shaped recovery). Meanwhile, Multi-unit construction is down 34.1% over the same time period. What’s good about this is that Single-family construction adds more economic activity than Multi-family units as Single-family units typically have greater appreciation, better tenants, and numerous, more lucrative exit strategies. While the Empire State activity index disappointed for November, the Philly Fed index exceeded expectations. To top it off this week, the National Financial Conditions Index (NFCI) showed that financial conditions have continued to loosen and that we are close to the levels of Aug of this year and October of 2019. Unlike during the surge in COVID cases in March, the NFCI is not getting worse like it did then – it’s getting better.
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3. Are We Headed For Lockdowns Again? As I’ve said before, I never want to assume that our fearless leaders will do the logical thing. The lessons that we learned in July when we saw 2nd quarter GDP decline by nearly 33% (greatest single quarter decline in history) should be enough to keep us from nationwide lockdowns this time. While the virus itself is certainly of concern, the amount of damage that would be done by shutting down nationwide again would put all 330 million U.S. inhabitants at risk (see recent study), not just those vulnerable to contracting the virus. A recent report from Bank of America stated, “people have become tired of the weird world of social distancing and have started to take more chances. They are also tired of shutdowns and are increasingly willing to accept worsening public health for a more open economy.” At this point, unless the economic data (see NFCI above) were to drastically change in a hurry, we don’t see the risk of a double-dip recession. Adults that are at high risk of contracting COVID should take whatever precautions they deem necessary. But, we have to look at the virus numbers with perspective and not just the absolute numbers that often run at the bottom of the screen on news network chyrons. While more than 11 million people have contracted COVID in the U.S., more than 11 million people have also recovered from the virus – the latter number not typically provided during a newscast. While more than 240,000 deaths have been attributed to COVID, and that is tragic, this is not even close to how deadly the 1918 Flu Pandemic. According to the CDC, 675,000 people died in the U.S. during that pandemic. That accounted for 0.65% of the population in 1918 (103 million people). While the book has not ultimately been written on COVID, so far, deaths from the virus have accounted for 0.08% of the U.S. population (330 million people). Deaths are never to be taken lightly, but 3 vaccines are nearing distribution, so the death toll should be mitigated going forward. What the people didn’t do in 1918 was stop living. The picture below was taken at a Georgia Tech football game in 1918 during the pandemic. While masks are being worn in this picture (clearly as a precaution), the stands were full and people continued living.
Photo taken by Georgia Tech graduate Thomas Carter. Click here for details.
Lockdowns are being pursued in certain states – CA, NY, WA, PA, & MI – which is a concern for the overall economy as each of these particular states contribute $6.2 trillion toward US GDP. The graph below depicts the U.S. Fatality Rate from COVID. What we can learn from the 2nd surge in June/July is that Fatality Rates in the U.S. did not increase hardly at all (with the exception of MI) during that surge and so far, the fatality rates are not increasing during this most recent surge in cases.
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Lastly, the question becomes one of hospitalizations. While the Midwest and a few Western states have increased inpatient COVID beds as a percent of beds available, most of the country is less than 10%. There’s no reason to hit the panic button as 4 of the 5 the states with recent shutdown measures – CA, NY, PA, & WA – are at or below 9.9% bed occupancy.
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Disclosures
Sources: National Financial Conditions Index derived from the Federal Reserve Bank of Chicago (https://www.chicagofed.org/publications/nfci/index). Weekly Jobless Claims derived from the St. Louis Federal Reserve (https://fred.stlouisfed.org/series/ICSA). S&P 500 performance derived from Investing.com (https://www.investing.com/indices/us-spx-500).
All sectors and indices shown are unmanaged and investors cannot invest directly in any index. The graphs shown are for illustrative purposes only. Opinions and forecasts expressed herein may not actually occur. Performance data quoted represents past performance, which is not a guarantee of future results.
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