Goldman Sachs’ Reopening Monitor Is Colliding With Virus Cases

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The U.S. is slowly reopening, a positive for several cyclical sectors. Contrary to the economic data uncovered by many on Wall Street, coronavirus cases have been climbing, threatening the narrative that the days of lockdowns are over. 

After having dropped about 7% from its post-March 23 high last week, the S&P 500 is now up 3.7% from the low of that recent sell-off. The Federal Reserve has added to its corporate bond-buying program and states have continued to reopen. The S&P 500 is just 8% from its all-time-high. 

A team of Goldman Sachs equity analysts in internet, technology and consumer sectors, have been updating investors with a reopening scale, from one to ten, with one representing full lockdowns and 10 representing a full reopening. In week 7, the scale sits at a tick above 2. "Movement across a number of categories creates a picture of stable progress in return to normal,” the analysts wrote. "Although we continue to see improvement in underlying metrics in the hardest hit categories like dining and retail, much of this week’s improvement came from moderating growth in eCommerce, streaming media, and declines in food delivery.” Simply put, the positive move in the scale recently has been attributable to decelerating growth in stay-at-home activities and less from back-to-normal activities. 

Meanwhile, virus cases have surged. John Hopkins data show that the 5-day moving average of new daily coronavirus cases in the U.S. is at 23,000 Wednesday, up from 17,000 a few weeks ago. Many market participants and analysts have said a spike in virus cases is the market’s biggest fear and indeed the recent sell-off coincided with that spike. But it’s clear now that stocks won’t truly correct unless states shut down again. 

Visiting Goldman’s reopening scale, video chat app downloads soared 613% year-over-year for the week ended June 17. E-commerce app downloads rose 77%. Staples shopping rose 8%. But Goldman’s graph shows those growth rates were largely far higher in March and April, with a peak in March. 

On the back-to-normal side of things, flight search volumes fell 52% for the week, far better than the 80% decline seen in the week ended April 7. As restaurants open with restrictions, casual dining capacity is up to 50% from 34% two weeks ago. Goldman’s graph shows these activities troughed near the end of March or start of April. Also of note, home buying demand grew 25% for the week, according to Goldman’s look at data from Redfin, a real-estate brokerage company. 

Restaurant and airline stocks, which were crushed in the bear market, have rebounded strongly since late March. Darden Restaurants  (DRI) - Get Darden Restaurants, Inc. Report fell 71% in the bear market and has since rebounded 120%, against the S&P 500’s plunge of 34% and bounce of 40%. Restaurant Brands International  (QSR) - Get Restaurant Brands International Inc Report, which owns Burger King and Popeyes, fell 56% at the bear-market low but has since risen 96%. Over the same period United Airlines  (UAL) - Get United Airlines Holdings, Inc. Report fell 76% from its 2020 high and rebounded 80%, a trend seen across the airlines business in the U.S. 

Bank stocks have rebounded viciously as well, as monetary and fiscal stimulus, supporting spending, has steeped the yield curve, a huge positive for bank profitability. Plus, massive debt issuance in May, as corporations look to shore up liquidity while waiting for more reopenings, has proven to investors that the demand for loans certainly isn’t weak. 

Since mid-May, investors have rotated into cyclical and value stocks far more than they had before, although growth stocks have held steady. Since May 13, the Vanguard S&P 500 Value etf  (VOOV) - Get Vanguard S&P 500 Value ETF Report is up 11.3%. Its growth counterpart  (VOOG) - Get Vanguard S&P 500 Growth ETF Report is also up 11.3%. 

The valuation gap between value and growth stocks has converged and the broader market is once again reaching a rich valuation level. 

What to watch next: whether states close up shop again. That may not tell all. Businesses are better equipped to allow employees to work from home and to allow customers to buy from home and stimulus may keep flowing. But lockdowns are by no means a positive. 

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