COVID-19 Stays A Problem

COVID-19 seems to still be a major issue for the south and the west. There was some hope that the July 4th holiday caused the spike in cases & deaths earlier in the week. However, bad results have remained even through Thursday.

The good news is the 7-day average of growth in new cases looks to be falling. The problem is we need new cases to fall quickly on an absolute basis. Obviously, at a certain point growth will fall. Precautions are being taken and there’s only so much it can grow in these specific areas. Because deaths lag, they have been increasing. 

Some projected the 7-day average of new deaths would get to 750. It won’t get near the previous peak because younger people are getting it and care is improving. There were 960 new deaths on Thursday unfortunately. This brought the 7-day average to 625 which is up from the bottom of 516.

One theory states that testing is being done earlier, so the lag between the spike in cases and the spike in deaths will be delayed. This lag could be 3-4 weeks. The 7 day average of new cases went above 30,000 on June 23rd which was over 2 weeks ago. We will know for sure how deaths react in the next 1-2 weeks. Deaths might not peak until August. That’s a scary prospect. The main goal is to get the positive test rate down through more testing and less spreading.

As you can see from the chart above, the positive rate on COVID-19 tests has been increasing since June. In my opinion, the states with the greatest issues have been too slow to react. Reactions have been much less severe than we saw in the northeast and Italy this spring. For example, Texas recently mandated people to wear masks in public. This is a far cry from the complete shutdown in New York City that went from late March through early June.

Back in the spring, we had less of an understanding of COVID-19 and deaths were exploding in New York and New Jersey. That being said Texas, Florida, California, Arizona, and Georgia shouldn’t tread lightly with this as cases are very high and deaths are a lagging indicator. The main variable is if everyone wears a mask. If they don’t, there needs to be regional shutdowns for a few weeks to stem the pandemic.

As you can see from the chart above, the percentage of states with increasing restrictions is increasing. At first, the number on hold increased. Now, almost 80% are on hold or increasing restrictions. One issue with this chart is it is rate of change analysis. That means even if all states are adding restrictions, they aren’t necessarily on the level of the shutdowns in April. They are increasing but to a lesser degree.

Small Businesses Are Closing Again

All the signs that you’d expect to see in an economy that is being shuttered again are here. For example, consumer spending growth has been slowing. As of July 8th, growth slowed to -9.4% in Texas, -9.8% in New York, and -15.8% in California. 

Furthermore, the OpenTable data shows yearly growth in restaurant reservations in the past 3 days ending on Wednesday has been -63.4%, -64.8%, and -65%. Growth has fallen in the past few weeks. This data is volatile, but growth certainly isn’t up from last month.

As you can see from the chart below, the number of small businesses open has fallen 18.1% in Florida and 18.8% in Texas. Those recent declines make sense. It's surprising that the number of New York small businesses open is down 26%. Small firms are the lifeblood of the economy. The economy can’t be boosted by the FAANG companies alone.

Consumer Comfort Falls

Consumer comfort in the week of July 5th fell for the first time in 7 weeks as you can see from the chart below. This is a lagging index as it took until May for it to bottom. However, you can argue this is a very strong signal because it is falling while the stock market is rising. 

Now the stock market is no longer as important to confidence as it was previously because people care more about their health and if they have a job than the stock market. The stock market has become disconnected from the economy because of the tech bubble.

Specifically, the index fell 0.4 to 42.9 in the week ending July 5th. We’re starting to get a complete economic picture of the first week of July; the data looks bad. Buying climate index and sentiment in the south hit 3-week lows. Obviously, the south has been the hardest hit by COVID-19 recently, so it is taking a toll on consumer spending. The overall index is now 24.4 points off its January peak (highest level in 20 years) and 8.2 points above its May bottom which was a 6 year low.

Sentiment on personal finances fell which makes sense because the labor market weakened. Sentiment on the economy hit a 3 month high probably because of the rise in the stock market. Unfortunately, the rise in FAANG stocks doesn’t mean the economy is strong. Sentiment among women rose to its smallest difference with men since March 2017. 

Conclusion

COVID-19 cases are increasing which is causing more states to shut down which is hurting consumer confidence. The stock market is only up because of the big tech stocks. The overall index doesn’t reflect how the economy is doing. Cyclical stocks tell you the economy is weakening. The stock market sees the weakness. 

Investors aren’t properly positioning themselves. Best trade should be to buy secure companies, not speculative biotech, cloud, or EV stocks. This bubble in tech will pop regardless of whether the economy improves or gets worse.