The Rally’s Next Hurdle: A Wave Of ‘Second Wave’ Coverage

Florida reported a 3.6% rise in COVID-19 cases on Saturday, underscoring fears that between increased testing and the (possibly haphazard) resumption of “business as usual” across the country, the virus is poised to make a comeback in some locales.

While it’s far from clear that one can attribute the worst week for US equities since March to an uptick in infection rates, rising case totals in some parts of the country certainly didn’t help, and there’s a very real sense in which the likes of Steve Mnuchin would be advised to avoid making proclamations about the impossibility of shutting down the economy again.

Mnuchin’s “we can’t do that” soundbite (and other quotables to that effect from administration officials) arguably do more to hurt market sentiment than help. That kind of rhetoric amplifies fears in two ways: first by paradoxically confirming renewed shutdowns are possible, at least on a limited, case-by-case basis (if they weren’t, why would you even entertain the question?), and second by creating a sense of angst with references to the damage the economy would incur.

Read more: Rotation Frustration Grips A Suddenly Terrified Market, As Mnuchin Says ‘Can’t Shut The Economy Again’

It would be far better for administration officials to field questions about prospective regional lockdowns by simply trotting out bland, boilerplate responses.

For example, a foolproof rejoinder to leading questions from the media might simply go as follows: “As a nation, we’re past the peak, and while it’s up to local officials to make decisions affecting their jurisdictions, we think that on the whole, the economy is on the road to recovery”.

The point is, the communications strategy at this juncture should be to avoid saying anything false from a public health perspective (obviously), while simultaneously steering clear of remarks that might derail market confidence. That shouldn’t be all that difficult. All one has to do is conjure some variant of the nebulous example above.

In any event, America is on the move. Things are getting back to some semblance of normalcy. I want to take this opportunity to update a few key charts tracking the reopening process in case it suddenly comes to a halt. Readers will recognize some of the visuals and also some of the language that accompanies them.

According to Apple’s mobility data, driving activity has largely normalized in major metropolitan areas across the country.

Looking out across the other high-frequency data sets I monitor, similar trends are evident.

The chart below is derived from OpenTable’s data on year-over-year seated diners at restaurants on the company’s network across all channels, from online reservations, phone reservations, and walk-ins. The comparisons are from the same day of the week in the previous year.

And speaking of your local diner, Homebase data (which compares a given day to the median for that day of the week for the period January 4 to January 31), shows the volume of hours worked by employees trending higher.

As a reminder, the Homebase data set is well worth consulting, and I’ve cited it habitually over the past several months. The company’s technology (it’s basically just a scheduling and time tracking tool) is used by more than 100,000 local businesses. Homebase notes that its customers in the US “primarily consist of restaurant, food & beverage, retail and services and are largely individually owned/operator-managed businesses”. Hours worked are now down “just” ~30%, versus as much as 75% during the worst days of the crisis.

As you might imagine, airlines are still struggling mightily, but even there, the trend continues to improve.

Passenger traffic is picking up, although the recovery is much less robust than that seen on America’s highways and in the country’s restaurants. Total traveler throughput hit 500,000 for the first time since March 21 on Thursday.

All of the above makes clear why talk of renewed lockdowns is such a sore spot for markets. This is why I continually suggested that the best economic rationale for not reopening too quickly (the public health rationale is self-evident) was simply that a second shutdown would be devastating to confidence once activity picked up materially.

I suppose what I would note is that there really is no set definition of what constitutes a “second wave” when it comes to COVID-19. Houston clearly has a problem (pardon the NASA pun), and any locale witnessing a sharp uptick in hospitalizations deserves careful monitoring from a public health perspective. For market participants, the concern is that headlines containing the words “second” and “wave” start to proliferate, weighing on sentiment and perpetuating the kind of self-feeding loops that drive volatility higher and start tipping dominoes (i.e., triggering unemotional selling/de-leveraging).

The risk of dour headlines piling up seems elevated, but the good news is that the scope for meaningful de-leveraging seems fairly limited, given light positioning. Even CTAs (which were among the “first-movers” in the rally and were a source of selling during Thursday’s dramatics) aren’t really “stretched”, per se, with exposure in just the 10-20th %ile range. “Net’ $ exposure across the 13 global futures is basically a neutral ‘zero’ line, Nomura’s Charlie McElligott said Friday.

(Nomura, BBG)

The administration would do well to be a bit more careful about managing the narrative next week if Trump hopes to avoid another selloff.

Some attributed Thursday’s brutal rout to Jerome Powell’s purportedly dour tone during Wednesday’s press conference, but if I had to point any fingers when it comes to what soured sentiment (thereby exacerbating profit-taking in a pro-cyclical trade that had clearly run too far, too fast), I’d be inclined to cite the way in which the prospect of new local lockdowns was managed by the media and by administration officials responding to those media reports.

To reiterate, the odds of that kind of dynamic playing out again appear high to me.

One of the most read stories on Bloomberg this weekend is called “Second US Virus Wave Emerges as Cases Top 2 Million”.

If you click on that story on the website (as opposed to the terminal), a sub-menu which reads “COVID-19’s Second Assault on America Is Already Underway” drops down from the header.

And, in case that’s not enough to get your attention, over to the right on the sub-menu is a link to another piece called “What you need to know” and then an option to receive real-time e-mail alerts “for all the most important developments”.

None of this (I repeat none of this) is to in any way, shape, or form, downplay the significance of rising infection rates. Rather, the point is that this is a headline-driven market. And not everyone thinks before they react to headlines. That’s especially true for machines, which cannot, by definition, “think” at all.

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