COVID-19 Still Bad In Select States

Many continue to believe COVID-19 is a risk factor for markets. Bulls like to say that the deaths are down and this isn’t a 2nd wave. They are correct, but they leave off the increase in hospitalizations and the increase in the percentage of tests that are positive. This latest spike in the south and the west isn’t nearly as bad as it was in early April in New York. 

However, there will still be economic disruption. The market is euphoric and looking past all negatives. That doesn’t mean the negatives don’t exist!

The stock market is on a roll, but COVID-19 was terrible on Tuesday. There were 36,015 new cases which is the highest since May 1st and the 3rd highest reading ever. There were 863 deaths which was the highest since June 11th. That ruins the bullish narrative, but it’s also only one day. 

We all hope deaths fall, but that doesn’t mean we ignore the possibility of them increasing due to the increase in cases and the spike in hospitalizations in a few states.

To be clear, it’s severely problematic that hospitalizations are bad in specific places because it doesn’t help if other areas were doing well. Texas is one of the worst states as there were 5,370 new cases on Tuesday which was a record high. There were only 33 deaths but look at the chart below of hospitalizations. It’s rising every day and has gotten above 3,000. The trend is terrible.

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Worst area in Texas is Harris county which has had 24,421 cases and 335 deaths in total. That county includes the city of Houston. As you can see in the chart below, the restaurant bookings data is crashing in Houston even without shutdowns. The economy doesn’t need a shutdown to be hurt by the virus. People are smartly avoiding human contact. This chart for Charlotte looks exactly the same. These are major cities and states being hurt.

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There were 6,503 new cases in California which was a record high. There were 68 deaths. On the one hand, there is a lag between cases and deaths which means deaths will increase in the next 1-2 weeks. On the other hand, younger people are getting it which means there won’t be as many deaths nationally as there were in early April. 

Bulls build a straw man that any negative news means the market and the economy will go back to late March. That’s not happening. This is an incremental negative that markets are ignoring.

Review Of The Improving Consumer

Redbook same-store sales growth reading in the first week of June was incredibly horrible on a historical basis. To be clear, it’s high single-digit decline is better than most other reports, but for this one, it was near the worst ever. Since then, we have seen improvement. In the week of June 20th, same-store sales growth increased from -8.3% to -6.1%. That’s a big improvement in 2 weeks. It’s unsurprising because almost all the data has been getting better for months.

The chart below is one example. As you can see, the 7 day average of total nonrecurring spending with Chase cards has improved to about -10% growth. This gets at the points just made. Most readings were worse than Redbook on an absolute basis, but they have been steadily improving. The stock market is fully pricing in growth getting back to the low to mid-single digits which is normal. 

If there is ever a setback in growth, we will see a correction in stocks. Frankly, many are calling for a correction even without an issue with spending. Remember, income growth was very strong in May because of the extra unemployment benefits and direct checks. Let’s see what stimulus the government passes in the next few weeks.

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June PMI Composite Flash

The chart below contextualizes diffusion indexes. The economy is improving, but it’s not back to normal just because diffusion indexes get above 50. As you can see, the trend in underlying activity just needs to get less bad for PMIs to increase. That being said, the economy isn’t exhibiting an L shaped recovery. This is an extreme example to make a point.

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Markit flash June composite index rose from 37 to 46.8 which is a 4 month high. It's surprising that it’s still below 50. Services index rose from 37.5 to 46.7 which is also a 4 month high. Manufacturing and manufacturing output indexes hit 4-month highs as well since the economy has had a high correlation. Everything went down and rebounded together as the economy shut down and reopened. Manufacturing PMI rose from 39.8 to 49.6 and the output index was up from 34.4 to 47.8.

May industrial production report was one of the few indicators that missed estimates in May. Let’s see if it rebounds in June. Some have been calling for a swift manufacturing recovery because this sector is used to steep drops and quick bounces; it is highly cyclical. However, if there is another trade spat, this sector will be hurt. Apparently, Navarro spoke out of line on Monday, but that’s not to say U.S./China relations are in great shape. They were hurt by the COVID-19 crisis.

Chief business economist at Markit said the following, “Flash PMI data showed the US economic downturn abating markedly in June. Second-quarter started with an alarming rate of collapse but output and jobs are now falling at far more modest rates in both the manufacturing and service sectors. Improvement will fuel hopes that the economy can return to growth in the third quarter.”

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Markit is projecting the U.S. economy to drop over 8% in 2020. Remember, the Fed projected a 6.5% decline in GDP this year at its latest meeting this June. As you can see from the chart above, this was the shortest and deepest recession in 100 years. It was deeper than the Great Depression, but this likely won’t be considered a depression because it was short. To me, a depression is an elongated recession.