Quadrants of Possibilities
At Allegiant we are big believers of utilizing copious amounts of data as the base for our decisions. We advocate using primary sources instead of secondary opinions of the data. Most importantly, not all data is equal, and the way numbers are sliced and diced can matter greatly. As such, we pride ourselves on producing high caliber Proprietary Research that supports our mission of being our clients’ most trusted advisor.
When examining economic or market data, many times the most recent number is the focal point in analysis. However, that number is almost meaningless without viewing it in context to the bigger picture. Numbers are lonely if they are presented by themselves; more important than any singular number is how that number relates to others. This inter-relationship between numbers provides the basis for elevating raw numbers into valuable insight.
While trying not to oversimplify the subject, we can view data in four distinct quadrants of possibilities: good and improving, good and weakening, bad and weakening, and bad and improving.
On an absolute basis, the best possible quadrant to be in is the good and improving quadrant. Here the numbers are strong and getting even stronger. This is where the U.S. economy was in 2018. But once again, the absolute basis may not be the most insightful analysis.
As an example, markets are generally forward-looking. So, while on an absolute basis the good and improving quadrant is the best to be in, market returns can be even stronger in the bad and improving quadrant. Why? While the numbers on an absolute basis are poor, markets have already factored these bad numbers in. The transition from a weakening to an improving situation is a key driver of future returns. And since the numbers are improving off a low base, there is lots of room for improvement.
In today’s environment, it is important to analyze the COVID-19 outbreak, the economic impact, and investment markets separately. Controlling the virus is the first battle. Only then can the economy recover. Investors will try to gauge both of these situations and price markets accordingly, often in advance of the confirming data releases.
Without widespread testing we cannot place a high level of reliability on the total number of COVID-19 diagnoses. However, the direct data coming out of Johns Hopkins still provides meaningful information to analyze. While the data from February put us solidly in the good but weakening quadrant, the spread of COVID-19 quickly shifted to bad and weakening through March.
The daily numbers are currently at or near their highest level, but the curve does appear to be flattening. If this holds, this will move the COVID-19 outbreak into the bad and improving quadrant - a very positive sign. Yes, the raw numbers will be bad - and each one carries an emotional toll - but improving relative numbers allow us to look forward and focus more on the environment once the virus is controlled.
In addition, the advancement of new testing standards, treatment plans, and vaccines could quickly accelerate the improving trend. However, there is also the risk of a second wave of the outbreak, which would push us back into the bad and worsening quadrant down the road.
As the curve flattens on the outbreak the economic transition is slightly delayed. In our analysis, the U.S. economy was in the good and improving quadrant for much of 2018, shifted to good and weakening in 2019 prior to the COVID-19 outbreak, and quickly went to bad and weakening over the past month. The last few weeks of early economic data shows a dreadful situation, breaking historic records. The government has infused a lifeline into the economy to support us through this short-term freeze. Once the freeze starts to thaw, we expect the economy to move from bad and weakening to bad and improving. As investment markets are forward-looking, this is an important transition point.
Evaluating data on multiple levels allows us to identify transition points as the U.S. fights the outbreak and the economy returns to a more normal environment. While the absolute numbers are certainly noteworthy, diving deeper into the second derivative - the rate of change - gives us more insights into the future.
As always, the Allegiant Investment Research Team continues to analyze data sets on multiple levels. Not only are the actual numbers important but analyzing how they relate to other numbers turns knowledge into wisdom. We are looking for signs that the situation is improving, even while the absolute numbers leave much to be desired.
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