Big Blue Sneaker Wave

361 Capital Market Commentary | October 5th, 2020

Well, that one came out of nowhere. Epidemiologists everywhere will be studying how a Saturday afternoon in the White House Rose Garden became a superspreading nightmare for the GOP. It’s incredible to think that after raising $10 billion in political donations for the race to the White House and Congress, a 10-cent piece of PPE will have decided this entire election. Well that and the passing of Ruth Bader Ginsburg. Between the POTUS debate on Tuesday and President Trump’s contraction of the virus, the upcoming election polls have tilted to the Democrats significantly. The political polling geeks at 528 now show North Carolina and Ohio electing Vice President Biden while Georgia, Iowa and Texas are next on deck for Joe to try and add to his stack of States. The craziness of 2020 continues.

The financial markets appear to be looking past 11/3 and taking the future blue wave in stride. Stocks are moving back toward highs as the consensus builds that a blue Washington D.C. will work quickly to stimulate the economy by finally passing the COVID aid package, increase foreign trade though tariff elimination and implementation of a very large infrastructure package. Value and cyclical stocks should continue to outperform as investors warm to this stronger economic recovery. Over in the bond market, expect to hear the term “Biden Squeeze” in the future as it relates to rising longer yields. Today’s big move in long rates should continue to scare fixed income investors as inflation expectations will rise due to the improvement in economic outlook, combined with an increase in future Treasury supply due to the new debt being added. The credit markets should continue to improve as we get closer to a vaccine and an increase in COVID testing.

Unfortunately, in the short term we are seeing a continued COVID hit to the economics of many businesses: airlines, hotels, restaurants, movie theaters, and most anything located in the state of Wisconsin. Many newly laid off employees need a longer lifeline and Congress continues to squabble over it. A new stimulus deal will get done, but the current question is when? Before the election, during the lame duck session, or in January. If it waits until January, then it is going to be a difficult holiday season for many. Then again, we have all gotten used to tightening our belts and lowering our expectations this year. Maybe those viral Tik-Tok videos from last week have it right and all we really need right now is a skateboard, cranberry juice and Fleetwood Mac.

Goldman is going to surf this big new swell that just showed up…

@JimPethokoukis: GOLDMAN SACHS: A Democratic “blue wave” would “likely result in substantially easier US fiscal policy, a reduced risk of renewed trade escalation, and a firmer global growth outlook.”

Goldman Sachs

10-year U.S. Treasury rates just popped…

The biggest financial market in the world is telling you to pay attention. Investors looking for yield are going to be forced elsewhere. Maybe into the credit markets. Maybe into dividend-paying stocks. Maybe into foreign bonds. If we can get past COVID, and the Government helps the unemployed while also accelerating the growth rate of the economy, then long Treasury bonds are going to be a difficult place to invest.

U.S. Treasury Rates

Coincidentally, it is that time of year that the stock market likes best…

Seasonality
(@ISABELNET_SA)

If only there was a way to bubble the Magic Kingdom from COVID…

Once testing and tracing becomes more available and less costly, Disney will be able to open their theme parks and millions of other businesses will be able to return to near normal. A vaccine will help, but customers will still need to be tested. We will get there.

Tweet from @IvanTheK

But until we get to better testing, the layoff announcements will continue…

Tweet from @RyanDetrick

And without better testing and tracing, two-thirds of big city hotels will not make it…

Tweet from @LizAnnSonders

What will happen to the healthcare system when millions of procedures are expected to be deferred in 2020?

Every household probably has decided to delay a procedure this year. Once testing and tracing become more widespread and a vaccine becomes available, the operating rooms will be filled again.

While some patients may ultimately decide to seek alternatives to surgical care or have symptoms resolve before seeking care altogether, survey respondents said they expected around 80 percent of deferred procedural care to ultimately result in cases (for example, when patients report that they feel more comfortable returning to hospitals, or when a vaccine or effective therapeutic is widely available). Using this estimate, there may be two months or more of excess surgical demand across the United States by the end of 2020. For the United States to work through two months of excess surgical demand in less than one year, it would require hospitals across the country, on average, to operate at 120 percent of historical volumes for ten straight months. However, this type of throughput increase is unlikely, as less than 50 percent of systems reported they would be able to increase volumes significantly above their historical baselines largely due to limited provider capacity. As such, a more realistic scenario is if health systems were to instead operate at an average 10 percent increase above baseline volumes; in this case, around 20 months would be required to work through the pent-up demand from 2020.

(McKinsey)

Surgical Backlog

NextEra Energy is now bigger than ExxonMobil…

Alternative energy stocks continue to outperform all others as the likelihood of a future spending boom from the blue wave increases.

NextEra’s ascent and ExxonMobil’s decline reflect a collapse in oil consumption in the pandemic, the rise of renewable resources on the electric grid and investors’ desire for steady returns at a time of low interest rates.

“We’re seeing just enormous demand for renewables right now,” Jim Robo, NextEra’s chief executive, said on Wednesday during an interview with a Wolfe Research analyst.

(FinancialTimes)

Renewables leader eclipses largest oil major

One good argument for returning to the office…

Tweet from @arrington

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