Things were very quiet in markets this week as both global equities and US bond yields were flat. Furthermore, equity markets have also been flat on the month so far. Even the Goldman Sachs risk appetite indicator is hovering around zero – so not too hot and not too cold as Goldilocks says in The Three Bears.
During risk-on days, news outlets are full of analysts and commentators telling investors that the economy is set to boom and indeed data coming out of most economies has indeed surprised significantly to the upside. However, during risk-off days the same news outlets are full of analysts and commentators telling investors that the virus will be with humanity forever, causing lasting and irreparable damage to the economy. Indeed, investors have had some bad news this week regarding some states in the US.
Yesterday, the number of new cases of COVID-19 reported in the U.S. rose to more than 37,000, the highest daily change so far. Governors are halting reopening plans with Texas, North Carolina, Louisiana and Kansas all hitting the pause button.
Investors are also seeing some signs of odd situations in the markets. The market capitalisation of Apple is now the same as the entire US banking sector and Shopify has the same market cap as Citigroup. Ford, with $150bn in revenues, now has a smaller market cap than Okta, a software company that has just $640m in revenues and negative operating margins.
ICU Severity Index
The authors of this note have launched their own US ICU severity index. The idea is simple. It is accepted that as economies open-up again countries will see selected outbreaks of the virus. This is particularly true in US states less affected by the virus so far. The predominant fear driving investor sentiment is the prospect of overrun hospitals and, specifically, ICU (so intensive care unit) capacity. The index looks at states where the available ICU capacity is below 30% and simply calculates what percentage of the US population is living in such states. As of this morning, this number is only 14% so it is not apparent that things are out of control with respect to the virus in the US. Naturally, this index will be updated daily.
Swings and roundabouts
As things stand, investors should continue to expect that global industrial production will accelerate as September approaches and this should act as a positive driver of markets. On the other hand, they should also expect the peak in global industrial production momentum to occur just as US election uncertainty starts to have a major effect on the market narrative and this should prevent equities from surging into bubble territory. Biden is now in the lead, but readers should recall that Michael Dukakis had a 17-point lead over George Bush senior just a few weeks before the 1988 election. Undoubtedly there will be swings and roundabouts as November approaches.