COVID-19 Is Still A Problem

COVID-19 never really went away, but it’s about to be a problem again for the market. We saw the first negative market reaction in a couple of months to anything COVID-19 related when Apple announced it was temporarily closing stores in Arizona, Florida, North Carolina, and South Carolina. We're not expecting a return to the March 23rd low, but we do expect an increase in volatility.

June 19th was a terrible day for cases in America as they increased to 33,539 which is the highest since May 1st. The highest ever was only 39,072. We will likely see a new record high in the next week or two. That doesn’t mean the situation is as bad as then because there is more testing and fewer people are dying. However, it is getting worse because the rate of positive tests is increasing. Arizona, Texas, and Florida aren’t doing much to stop it, so it will likely continue to spread.

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Bulls who only look at deaths and say cases are up because of more testing are completely missing the point. People don’t need to die for the economy to be disrupted again. People will limit their interactions if there’s a risk of hospitalization. Cities might shutdown if their hospitals are overrun. 

As you can see from the chart above, the 7 day average of hospitalizations in Texas has gotten above 2,500 as there were 3,148 on the 19th which was a new record high.

There were 4,497 new cases in Texas on the 19th which was a new high. The 7-day average was 3,074. I think COVID-19 is limiting the market. If the headlines of closures increase, we could see a rout in stocks. An increase in U.S. cases is simple math. If states like New York have gotten the situation under control to the point where little improvement is possible, spiking cases in other areas like the South and the West are going to push up the total. We all want this virus to be eliminated as quickly as possible, but you must separate what you want and what you expect based on the data at hand.

Improvements At The Grocery Store

Grocery stores are seeing higher foot traffic as the economy opens up. The chart below shows since the bottom, the foot traffic index is up 39%. Trader Joe’s is doing the best with a 7.2% weekly improvement. Cornerstone Macro claims this is part of a V-shaped recovery. 

Many find that to be absurd. In any normal recession, traffic to supermarkets doesn’t fall. Obviously, when the economy opens up, there will be more foot traffic at stores.

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More consumer confidence helps restaurants at the behest of supermarkets. For that information, we have OpenTable yearly reservation growth. On June 18th, reservations were down 64% which signals there hasn’t been much improvement recently. Once phase 2 of NYC’s reopening plan starts on Monday, we can expect growth to increase rapidly. In terms of the restaurants open for reservation, growth was 59%.

No Shutdowns Still A Problem

It will be interesting to see how the economy reacts to an outbreak without major shutdowns. That looks like where we are headed. Many see individual companies shutting down and maybe some cities. The stock market should react to hospital data rather than shutdowns because the economy will be hurt even if there aren’t shutdowns. 

It's irrational to think the economy would have had only a minor hit without the shutdowns. The economy would have been hurt almost as much because the states that didn’t shutdown did almost as badly as the ones that did.

Sweden had a big hit to its economy without shutting down because it relies on trade. Essentially, it got the worst of both worlds as its economy was hurt and cases spiked. America is in a similar situation because the shutdowns in March and April didn’t do enough to stamp out the virus. Original states that that got it badly like New Jersey, have stamped it out, but many others are in trouble.

The chart below proves my point about the situation getting worse. Testing is up, but so is the positive rate. If you focus on the few problematic states, the positive rate increases further. The positive rate in Florida ranged from 2.54% to 3.84% from June 3rd to June 8th. 

From June 10th to June 15th the positive rate ranged from 4.94% to 7.46%, meaning the low was still above the high in early June. On the 19th, over 20% of COVID-19 tests came back positive in Arizona, while only 1% came back positive in New York.

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Fiscal Stimulus

It’s important to properly contextualize the situation with the fiscal stimulus. The economy needs a stimulus and the market is pricing in that it will get one. Stocks aren’t going to rally much if a stimulus passes unless it is strong. Stocks won’t rally just because something passes. If it’s small, we will see a selloff. 

A small stimulus would be $500 to $1,000 checks and no unemployment insurance or an extension of the unemployment benefits at a lowered rate and no direct payment. Congress generally agrees on the need for some help.

As you can see from the chart below, Congress has the least conflict in the past 40 years. On the other hand, the GOP doesn’t want to stay with unemployment insurance paying people more than their normal jobs do. There will be a compromise. We have no idea where that compromise will land which is why the market’s calm nature is likely wrong.

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Conclusion

Coronavirus is becoming a bigger issue as hospitalizations are spiking in Texas and Arizona. This isn’t going to cause another 34% decline, but it should cause stocks to correct further. The market’s cavalier nature is concerning. Once stocks start falling on scary headlines, they will keep falling. 

People who are fully invested are bearish anyway, so it shouldn’t take much to convince them to sell. Congress is likely to pass another stimulus in the next few weeks. However, we shouldn't just assume it will be strong. It will be an unnerving process as all political compromises are.