“All men’s misfortunes spring from their hatred of being alone.”
-Jean de La Bruyere
At this point, I think I’ve lost count of the number of days it’s just been me, Keith and a few others in the office. To put it simply: social distancing sucks. But regardless of your view of COVID-19, there is no question it is the right thing to do for now.
Personally, I’ve also found some benefits. More reading, more time to think, sleeping better and fewer distractions. We’ve been busy trying to determine whether there will be some permanent, or at least intermediate term, change in people’s habits.
To delve into this idea of whether COVID-19 will change people’s habits, we’ve been running a consumer-oriented survey for the last six weeks and below I’ve highlighted one of the key questions that relates to leisure travel:
Question: How likely are you to book future travel at one of the following options within the next 6 months?
→ Hotel or Resort - 66% answered unlikely or extremely unlikely
→ Vacation Rental Home – 79% answered unlikely or extremely unlikely
→ Ocean Cruise Vacation – 85% answered unlikely or extremely unlikely
Now obviously, as we all know, consumer mindset and sentiment can change quickly, but given the fact that the specter of COVID-19 is likely to be hanging over us for an extended period, we think it is likely that the changes in behavior outlined will endure.
Back to the Global Macro Grind…
The last Early Look I wrote was on February 27th and I highlighted the following:
“Currently, the market is faced with two key challenges, which to some extent are being characterized as Black Swans. The first is the COVID-19, or coronavirus. The second is the emergence of Socialist Democratic Bernie Sanders as the likely nominee from the Democratic Party for President.”
At that point, the market was still barely off its all-time highs and most of us, even someone like me who had been following COVID since early January had no idea what was to come. While my anecdotal observations at the time were interesting, they remained anecdotes. But as luck would have it, we have a process that serves as an early warning system.
The entire point of Keith developing the Quad process 15+ years ago was to enable bottom-up stock pickers to avoid dramatic macro related drawdowns. Thus, in February we were proactively prepared for a slowing economy. Now of course, while we were early in following and analyzing COVID-19, we didn’t fully understand the depth of what was to come. That’s where our quantitative over lay helped. As the volatility of volatility shifted into a new high-risk regime, it became clear that sh$t was about to get real!
But, now what? The Old Wall is already taking up price targets for the SP500, the Plunge Protection Team is in control, and the animal spirits seem to be fully back in control. The “now what" could very well be that many investors are missing the duration.
Admittedly, I’m neither a virologist or epidemiologist (on my best days I’m a knucklehead hockey player that snuck into a few Ivy League Schools), but this is what the data is telling me:
- The duration of the plateau – Not unlike the models of the old wall street bankers and brokers, the COVID-19 models have been way off. Initially, they were way too aggressive and now there is increasing evidence that they may be too conservative.
- The widely cited University of Washington model projected peak fatalities in the U.S. three days ago, we have since surpassed that (sadly) twice.
- The U.S. is now in a plateau of adding 25 – 35K new cases a day. As we know from Spain, Italy, and France, this plateau period can last a long time. We also know that mobility has been much higher in the U.S. during the shutdowns.
- While some areas of the country may open in late May, the numbers suggest life will begin getting somewhat back to normal in more of a Q3 time frame in the harder hit areas.
- There will be a second wave – I could write about the Spanish Flu or other epidemics, but let’s just focus on Singapore. As one of the earliest countries to record a case after China, Singapore implemented aggressive and very modern tracking systems of COVID-19. They had things under control, but, as we’ve highlighted in the Chart of the Day, that has changed. COVID-19 cases in Singapore are now grow 10%+ day-over-day and the government has implemented serious penalties for coming within 6 feet of someone not in your household ($10,000 fine and/or six months in jail).
To the extent you’d like to be added to my daily COVID-19 update note, which is all numbers and rate of change analysis, please sign up to be on this distribution list by clicking here.
Without much data at this point, it’s pure speculation as to what Q3 GDP might look like. But as consensus leans more and more towards a dramatic pick up, I’d hedge (or Hedgeye as it were) your bets appropriately. Now the benefit, of course, is the fortune of having more time alone.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.56-0.82% (bearish)
UST 2yr Yield 0.17-0.28% (bearish)
SPX 2 (bearish)
RUT 1130-1252 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 50.67-62.98 (neutral)
REITS (VNQ) 62.41-81.15 (bearish)
Consumer Staples (XLP) 54.30-60.91 (bullish)
Tech (XLK) 75.51-90.90 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 170 (bearish)
VIX 36.02-56.34 (bullish)
USD 98.70-101.19 (bullish)
Oil (WTI) 18.19-23.93 (bearish)
Nat Gas 1.49-1.86 (bearish)
Gold 1 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
