“Narrative is linear, but action has breadth and depth as well as height and is solid.”
-Thomas Carlyle
With none of the usual haunts currently open for a bachelor in his mid-40s, like many of you I’ve found myself doing more reading. Recently I’ve been slogging through “Adaptive Markets” by Andrew Lo and was, no surprise, particularly struck by his chapter “The Power of Narrative”.
Narratives influence almost every part of our life. In our field in particular, they influence what we do as stock market operators. As non-fact based views, they often provide justification for our actions. Or simply put: they make us “feel” good.
Perhaps one the most famous stories on Wall Street is when Joe Kennedy sold all of his stocks after his shoe shine boy gave him stock tips right before the crash. So what narrative are the proverbial shoe shine boys and girls of the 2020s telling themselves?
This headline from the ever contrarian indicator CNBC yesterday was noteworthy:
“Young investors pile into stocks, seeing 'generational-buying moment' instead of risk.”
Yes, the Robin Hoodies are buying hand over fist. Currently the six most popular stocks on the Robin Hood Trading app are: Ford (F), General Electric (GE), Delta Airlines (DA), American Airlines (AA), Disney (DIS), Go Pro (GPRO), and Carnival Cruise Lines (CCL). And no, we aren’t making this up.
Back to the Global Macro Grind…
As a result of the public health policy implemented due to the COVID-19 pandemic, an already long in the tooth economy was pushed into the greatest economic decline many of us have seen, or ever will see, in our life-times. We are now embarking into the great re-opening.
Clearly in many regions of the U.S. this is seemingly the prudent next step as testing levels have increased and active cases continue to decline. And as the old adage goes, the cure should not be worse than the illness. Based on our analysis R0 (R Naught), or the level of transmission, has fallen below 1 in every state, except Maine, Nebraska, Minnesota, and Wyoming.
We also have learned a lot more about COVID-19 in the past two months, most notably is that there is likely a large percentage of the population that is asymptomatic. So, while many will carry and transmit the disease, we likely won’t become a burden on the health care system. Based on the studies we’ve reviewed this asymptomatic population could be up to 80%.
Daily new cases and active total cases have declined meaningfully in much of Asia, Western Europe, and North America as these regions gradually open their economies.
Make no mistake about it though, the global pandemic is still very much alive. We would highlight a few key points on this front to make our point:
- Global active cases, currently sit at 2.43 million and continue to make new highs;
- Daily new cases continue in their sticky plateau they have been in for the past six weeks at 75 – 90,000; and
- The following countries - India, Brazil, Peru, Mexico, Russia, Pakistan, and Bangladesh - continue to hit new daily case highs and contain more than 25% of the world’s population. (Note: testing in these countries, with exception of Russia, is also very low.)
As painful as it was, there is no doubt that the social distancing measures put in place have slowed the spread of COVID-19 meaningfully. We’ve looked at mobility data from Google and compared it to case loads around the world (see the chart of the day) and the correlation, with a lag, is about as tight as you would expect. The question we are now experimenting with in real-time across the U.S. is: "What amount of lowered mobility is enough to keep R0 below 1?"
Not dissimilar to views of the economy, many COVID-19 “experts” have been proposing various letter shapes of how the COVID-19 pandemic will looking going forward.
Will it be a W? Will it be a L? Will it be a V? Just as very few of the experts predicted the exponential rise initially and then eventually under projected the fatalities, very few are likely to predict the next stage of the pandemic correctly either.
Regardless of your thoughts on COVID-19 and whether the public health policy that was implemented was an under-reaction, an over-reaction, or largely appropriate, one thing is very clear from the data: COVID-19 isn’t going anywhere despite the narratives people are telling themselves. (On that note, we will be adding a new subscription vertical to cover COVID-19 from all angles, so please email if you’d like to subscribe.)
Now, of course, this could change with the advent of a vaccine. However the “new normal” of business disruption, limited global mobility, and duress, at times, on the health care system likely will remain for the foreseeable future.
Back in my home province of Alberta before you are about to ride a bull (1,000+ pounds of angry sinewy muscle), they tell you to “Cowboy up!”. The same advice is likely prudent if you are going to bullishly ride the stock market over the next 12 – 18 months.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.59-0.74% (bearish)
UST 2yr Yield 0.12-0.22% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 8 (bullish)
Healthcare (XLV) 96.97-101.41 (bullish)
Tech (XLK) 87.98-96.37 (bullish)
Consumer Staples (XLP) 56.44-58.63 (neutral)
Financials (XLF) 20.39-22.97 (bearish)
Industrials (XLI) 59.09-64.24 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 19108-20631 (bearish)
VIX 26.53-39.97 (bullish)
USD 98.90-100.83 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
