Snapshot Week Ending 5/1/2020
US equities started the new month with a sizable 2.8% selloff on Friday led by large declines in market-leading Technology stocks, which resulted in a small 0.2% drop in the S&P 500 Index for the week which closed at 2830.1 This follows April’s strong 12.7% rally, the best 1-month rally since 1987 and 3rd best monthly gain of all-time.1 The S&P 500 has now rallied 30% from its March 23rd lows and sits only 11.8% below its year-end level.1 Each week is now filled with economic reports showing declines of historic proportions. Last week reports included Q1 GDP which fell 4.8%, the worst quarterly performance since the Great Recession of 2009.1 An additional 3.8m new jobless claims were reported, bringing the 6-week total to over 30m, and Consumer Spending fell 7.5% in April, the steepest decline since 1959.1 None of these dire economic reports come as a surprise to investors given the lockdown and most do not move markets. Investors remain focused on what will emerge in 2021 given the massive stimulus efforts of Congress and the Federal Reserve, plans for the economy’s re-opening in May, and positive news on the health care front including this weeks’ approval of Gilead’s drug Remdesivir for emergency hospital use. Earnings reports were a mixed bag last week with positive results from companies benefitting during the crisis like Microsoft and Facebook. However, Amazon disappointed investors despite reporting better-than-expected revenue growth of 26% saying they expect to spend their entire expected Q2 profits (~$4B) on Covid-related expenses1. Numerous dividend cuts, including the first cut from Royal Dutch Shell since WWII, also reminded investors that earnings and dividends have far from bottomed. Through the close Friday, year to date results for the major indices are as follows: S&P 500 -11.8%, Russell 2000 -2%, MSCI EAFE –18.9% and Bloomberg Barclays Aggregate Bond 4.9%.2
What We’re Watching in the Week Ahead
- Re-opening Steps – We’ll be watching plans for reopening and attempting to estimate when, and if, activity will return to normal. Are people ready to return to salons, stores, theaters, etc? We will also be watching the daily data on new cases and deaths from Covid-19, as any relapse in the encouraging trends recently would greatly impact investor sentiment.
- Economic Reports – Sales and earnings figures from a world that existed in Q1 hardly matters at this point, so we will be watching other indicators – signs of stress on the balance sheet and for indications of the company’s ability and intentions of paying the dividend. We will also be watching for signs of a company whose competitive position has expanded during the crisis as these companies will likely be market leaders and attain higher valuation metrics for some time.
- Normalized EPS/PEs – As we get deeper into Q1 and Q2 earnings, Wall Street and investors will attempt to estimate “normalized earnings”, or mid-cycle earnings, between peak EPS (for the S&P 500 that’s 2019 EPS of $165) and trough (to be determined..some estimates are as low as $100 for 20201). Our estimate today is in the $150 range. This looks past much of the one-time damage of the first half of the year but acknowledges that it will be some time before things return to normal. At 2830, the S&P sells for 18.8x normalized earnings. A bull argues that a PE of 20x is fair given the low levels of interest rates and inflation combined with the Federal Reserve’s “backstop.” A bear argues that with the risk of the virus’ revival, added debt taken on in recent months (and years), and the downside risks still present given the uncertainty of the recovery, a 15x multiple would be more appropriate. Based on these assumptions, the range of market outcomes over the coming months would be an S&P 500 range of 3000 to 2250 from our view.
As always, we appreciate your confidence in our team.
Fundamentum Investment Committee
Chad Roope, CFA® Portfolio Manager
Paul Danes, CFA® – Investment Committee
Trevor Forbes – Investment Committee
Matt Dunn, CFA® – Chief Compliance Officer
1-Morningstar Direct 5/4/20
Investment advice offered through Fundamentum LLC a registered investment advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the investment objective of any investment strategy will be attained. Investing involves risk including loss of principal. Past performance is no guarantee of future performance. All indices are unmanaged and may not be invested into directly.