| We begin this newsletter with research conducted by Baird Private Asset Management in response to the recent focus in the media regarding pressure on ICU capacity limits in states that have seen an upsurge in the virus.[1] One fact that has not been widely reported in these stories is that under normal conditions, ICUs at hospitals tend to run at higher levels of capacity, in the range of 55% to 82%. We examined the top 10 states by GDP contribution (cumulatively about 60% of total US GDP), and found that ICUs are actually running within or even below normal ranges.[2] This includes the Sunbelt states, Florida, Texas and California, which have been held out among the leading states experiencing case surges. Remarkably, over the last seven days total estimated ICU admissions have increased by a fractional 635 cases as compared to approximately 375,000 new cases, or 0.17% (Arizona saw a mere increase of 65 cases, and California was actually flat). This compares to peak ICU occupancy due to COVID back on April 17th of 18,000 compared to 6,396 today, when new daily case rates were half of what they are currently.[3] Equities. With the ongoing rally in stocks, investors continue to question whether current valuations are justified or disconnected from reality. A review of year-to-date industry sector performance suggests that recent valuations remain in-line and fairly priced, and that – with only two of eleven sectors significantly positive for the year – what appears to be disconnected are the indices themselves. Take the S&P 500 index for example, which is now down a mere -2.65% on the year, compared to the underlying sectors that comprise it. This is due to the market-cap weighted structure of this index and many others like it, i.e. larger stocks by market value make up a greater percentage of the index. With the run up in technology stocks, this one sector alone now comprises nearly 30% of the index. The valuations are not at a level that is concerning to us, but the concentration of this sector within the index is at a level we haven’t seen since the “Dot Com” bubble of the late 1990’s. What this means is that there are segments of the market that remain undervalued and attractive, and there are abundant opportunities in strategies away from the index. |
[1] https://www.cnn.com/2020/07/07/health/us-coronavirus-tuesday/index.html
[2] Source: States’ departments of health
[3] Source: Institute for Health Metrics and Evaluation
