Snapshot Week Ending 5/8/2020
US equities continue to look through the worst economic period since the Great Depression as the S&P 500 Index gained 3.5% last week to close at 2929.1 The Index has rallied 31% since the March 23 low and is now down only 8.7% in 2020.1 The NASDAQ Index, powered by the large Technology companies (Amazon, Google, Microsoft and Apple) and Covid-19 darlings (Netflix, Zoom, Moderna, Peloton) is now positive this year1. Last week’s shocking economic news was April’s Non-Farm Payroll report which showed a loss of 20.5m jobs and unemployment reaching 14.7%.1 One month erased 10 years of gains in new jobs created, leaving the unemployment rate at the highest level since records have been taken in the post WWII period.1 Only the Depression’s estimated 25% tops April unemployment rate.1 Another measure of employment (U6) which includes those that have given up looking for work puts unemployment at 22.8%.1 Any slight improvements are being rewarded in this period of extremely loose monetary conditions and excess liquidity. Last week’s example was oil, where a slightly less bad build in domestic oil inventories led to a 20% increase in the spot price of WTI oil at $24.63/barrel, driving a nearly 8% gain in Energy sector stocks last week.1 Now in the teeth of the economic decline, Q2 GDP estimates hover in the negative 30-40% range for most Wall Street economists,1 an unprecedented, but expected collapse. With many states now undertaking some degree of reopening, the pace of improvements in the rates of infection and deaths will be closely watched. A setback that results in further shutdowns does not appear to be factored into current equity levels and valuations in our opinion. Through the close Friday, year to date results for the major indices are as follows: S&P 500 -8.7%, Russell 2000 -19.9%, MSCI EAFE –18.2% and Bloomberg Barclays Aggregate Bond 4.5%.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.
- Dividend Announcements – While many companies have raised cash in debt markets and have down bank credit lines and could continue paying dividends, many will be forced to cut or eliminate their dividend. Two companies that have increased their dividends for many consecutive quarters, Southwest Airlines (174 straight quarters) and Exxon Mobil (148) have both broken that streak, though Exxon did maintain their existing dividend.
- 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
Sources:
1-Morningstar Direct 5/10/20
2-Factset 5/10/20
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.
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
Sources:
1-Morningstar Direct 5/4/20
2-Factset 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.
