May 11, 2020

Axios Markets

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🎙 “Perhaps the most valuable thing [my father] taught me was that there is no contradiction between devotion to work and enjoyment of life and people.” - See who said it and why it matters at the bottom.

1 big thing: The money is still on Trump

Illustration: Aïda Amer/Axios

Even after the White House's delayed response to the coronavirus outbreak, unprecedented job losses and a bruising recession, investors and betting markets are still putting their money on President Trump to win re-election.

The big picture: Presumptive Democratic presidential nominee Joe Biden holds a sizable lead in most national and individual swing state polls — but money managers still expect Trump to retake the White House in November.

  • In a late April survey of 908 U.S.-based investors with at least $1 million of assets, UBS found that 53% said they planned to vote for Biden.
  • But 52% think Trump will win.

The intrigue: The world's most popular betting destinations show Trump as the clear favorite.

  • The RealClearPolitics average of betting websites gives the advantage to Trump with an average spread of 8.2, as of Sunday night.
  • Casino sportsbooks are paying around $83 for winning bets on Trump versus $135 for winning bets on Biden, making Biden the unequivocal underdog, Bovada shows.

What we're hearing: The expectation for Trump to triumph seems to largely reflect optimism about the economy once various state and local lockdown orders end, economists say.

"We can’t expect that the economy is going to be in very good shape, although the trajectory ought to be pretty positive by November," Steve Skancke, a former Treasury Department and Council on Economic Affairs official in the Carter and Reagan administrations, tells Axios.

  • As November approaches it's "more than likely we’re going to see a positive stock market and there will be positive job growth," says Skancke, now chief economic adviser at wealth manager Keel Point.

Between the lines: "The wildcard obviously is the virus and the [potential] vaccine," Mark Zandi, chief economist at Moody's Investor Service, tells Axios.

  • "And that’s a very significant wildcard both on the downside and the upside for people’s perceptions of how the president managed all this and how they’re going to vote in November."

Yes, but: Thus far Trump has not gotten the expected bump that comes from national catastrophes as Americans typically rally around the flag and the president, says Bernard Baumohl, chief economist at the Economic Outlook Group.

  • "These are times when the nation as a whole, the American people, will look to the president and the White House for policies that will get them out of this mess and all they’re seeing is rhetoric designed to get Trump re-elected," he tells Axios.
  • "He wants to see the economy be revived again but before it’s safe to do so. That I think is going to become somewhat catastrophic when the numbers start to pick up for that second wave" of infections.
2. Catch up quick

The People’s Bank of China said it will resort to “more powerful” policies to counter the hit to its economic growth from the COVID-19 pandemic. (Bloomberg)

White House economic adviser Larry Kudlow said there won't be formal talks with Congress on additional coronavirus relief measures until late-May or June. (ABC News)

South Korea again closed down bars and clubs after seeing its largest one-day increase of new COVID-19 infections in a month, with more than 50 linked to a 29-year-old man who visited five clubs and bars last weekend. (WSJ)

New coronavirus infections accelerated in Germany days after it loosened social restrictions. (Reuters)

Chinese authorities reported what could be the beginning of a new wave of infections in the northeastern part of the country where officials raised the risk level to high from medium, a day after raising it from low. (Reuters)

3. Record-low science funding could slow coronavirus cure
Expand chart
Data: The Center for Systems Science and Engineering at Johns Hopkins; Map: Andrew Witherspoon/Axios. This graphic includes "probable deaths" that New York City began reporting on April 14.

The coronavirus pandemic "comes at a time when the US federal government’s investments in science are at the lowest levels in many years," Abby Joseph Cohen and Michael Hao Wu of Goldman Sachs Research write in a recent note to clients.

Where it stands: "The federal government now plays a much smaller role in advancing science than it did in the past. The consequence of this trend is particularly damaging for basic research, which depends on the government as its main source of funding.

  • "Since coming to office, the Trump administration has repeatedly attempted to limit funding for science, both for domestic research agencies and international public health programs."

By the numbers: In fiscal year 2019, federal R&D spending was 0.6% of U.S. GDP and 2.8% of total federal outlays, the lowest in more than 60 years, Cohen and Wu note.

  • In fiscal year 2019, federal R&D spending was down 14% from its 2011 levels.
  • "When adjusted for inflation, the first three years of the Trump administration had the lowest levels of federal R&D spending since FY 2002."
  • "The Trump administration has repeatedly tried to cut funding from federal research and public health agencies. Its FY 2021 budget released on February 10 proposed funding cuts of 18.6% for the CDC, 7.5% for NIAID, and 7.2% for NIH."
4. BANG beats FANG
Reproduced from The Felder Report; Chart: Axios Visuals

The FANG stocks (Facebook, Amazon, Netflix and Alphabet's Google) have performed well so far this year in the face of the coronavirus pandemic, but their returns have been dwarfed by the BANG stocks (Barrick, Agnico Eagle, Newmont and Goldcorp).

What it means: Investors have holed up in tech companies believing they are strongly positioned to weather the storm, but gold miners have driven significantly more value over the past two years. Since early May 2018, BANG has nearly tripled the gain of FANG, Jesse Felder of the Felder Report notes.

  • "Part of this dramatic outperformance is due to rising gold prices which have boosted revenue growth for the BANG stocks."
  • "Combine this with the fact that these stocks were trading at significant discounts to their historical valuations and you have a recipe for an explosion higher in prices."
5. How oil's collapse will weigh on U.S. economy
Data: FactSet; Chart: Axios Visuals

Investors have abandoned oil at warp speed so far this year as futures prices have fallen to record lows. Even as oil has bounced from its record trough in April, investors remain skeptical about the chances for sustained value appreciation.

Why it matters: "Typically, oil price fluctuations have a small aggregate impact on US growth, with roughly offsetting effects from the energy capex and consumption channels," Paul Choi, biotechnology analyst at Goldman Sachs, writes in a note to clients.

  • "However, the sharp rise in the likelihood of bankruptcies in the energy sector and spending constraints due to the virus suggest that the decline in oil prices might be a larger drag on growth this time."

The big picture: The U.S. is now the world's No.1 oil producer, which means more of the economy is dependent on oil and gas production.

What happened: Energy saw the biggest change in positioning of all market sectors, as traders sold nearly 80 million shares of energy stocks during the first quarter, Bank of America Global Research notes. That put energy's relative weight in overall fund holdings at its second-lowest level in the bank's data history, dating back to 2008.

  • Hedge funds sold oil at an even more extreme pace and held record underweights at the end of the first quarter.

What to watch: Oil's historically low prices mean that more bankruptcies are "likely unavoidable," Choi says. Goldman's estimates currently imply "a 50-60% year-on-year decline in energy capex in Q2/Q3, similar to the decline in 2015/2016."

  • In addition to the increased bankruptcies, that will likely also mean more debt and less investment for the companies that are able to survive, meaning sustained fundamental weakness in the sector.

The last word: Analysts expect oil will provide a net drag on overall U.S. GDP growth of roughly 0.25 percentage points, year over year, Choi says.

  • "While this would normally represent a meaningful drag on growth, in the current environment oil is unlikely to be a major factor for overall growth."

Thanks for reading!

Quote: “Perhaps the most valuable thing [my father] taught me was that there is no contradiction between devotion to work and enjoyment of life and people.”

Why it matters: Known as the "father of femtochemistry," Ahmed Hassan Zewail was a chemist who in 1999 became the first Egyptian to win a Nobel Prize in a scientific field.

  • Zewail's work showed that it is possible to see how atoms in a molecule move during a chemical reaction with flashes of laser light.