Weekly Snapshot June 22, 2020
Market Review: Week Ending 6/19/2020
The S&P 500 Index rose 1.9% last week to close at 3097, driven by the Fed’s announcement that individual corporate bonds will be added to the list of fixed income instruments they will buy in the open market.1 Rumors of a $1T infrastructure plan, along with encouraging signs of a readily available steroid treatment for severe Covid-19 patients also boosted stocks.1 These positives offset ongoing concerns about a second wave of the coronavirus that led to Apple’s announcing they will temporarily close 11 stores in Arizona and Florida,1 states that are among those experiencing higher cases and tightening hospital capacity. Investors also looked through ongoing civil unrest, following another killing of an African American man in Atlanta by police that led to the police chief’s resignation and additional protests. Technology stocks continue to offer growth and are also seen as safe to many investors in the Covid-19 world, leading the tech-heavy NASDAQ Index to a 3.7% increase last week.1 Following a 20bp fall in 10-year Treasury Bond yields two weeks ago, yields stabilized this week to close at 0.70%.1 We continue to track the real economy for reopening activity and the shape of the recovery. NYC reports that hotels there are now at 46% of capacity, compared to 76% in February and ~15% at the depth in April/May.1 Domestic auto sales for early June were reported to be at an annual run-rate of 12.2m, down from 16.8m in February and 8.6m at the trough.1 Proponents of a “V-shaped” recovery will cite the 42% increase off the bottom as an indication of the “V”, while Fed Chairman Powell might describe the auto industry as being back to only 72% of the pre-virus level. Both would be correct, an example of how the shape of the recovery is largely left to wide interpretation. Through the close Friday, year to date results for the major indices are as follows: S&P 500 -3.2%, Russell 2000 -14.4%, MSCI EAFE –10.3% and Bloomberg Barclays Aggregate Bond 5.9%.2
What We’re Watching in the Week Ahead
- Economic Reports – Reports released last week continued a trend of positive surprises, as reports during reopening have surpassed the worst-case assumptions going into the report. For example, Retail Sales for May was reported to increase 17.7% vs. April, a record monthly increase.1 The NAHB homebuilders Index also rose a record 21 points to 58 in June, indicating a solid bounce in U.S. housing.1 This week’s reports include Existing and New Home Sales, Personal Income and Spending, and the final estimate for Q1 GDP, estimated to be down 5% y/y.1 Bank stress tests will also be revealed this week, possibly providing an indication of future dividend cuts caused by the recession.1
- Valuation – Stocks typically sell at a discount to normal valuation levels during uncertain times. This time, we believe the uncertainty of where earnings will bottom during a once-in a-lifetime pandemic, has contributed to the rally in stocks. Rather than debate whether stocks are already discounting the improvements expected from an economy that is re-opening, without company guidance or any history of outcomes during a pandemic, valuation has effectively been eliminated from consideration. We do know that 2019 S&P 500 EPS were $165. What we don’t know is what level the economy (and earnings) will recover to – 80% of the previous level? 90%? 100%? And when? It will take many months to answer the question about the level of earnings likely in 2021 (the Congressional Budget Office revised its 10-year economic forecast, projecting that the U.S. economy would require the entire decade to make up for output lost in the pandemic). Until then, investors have largely eliminated high multiples as a reason for stocks to pause. We have been skeptical that stocks could go rally beyond 3000 on the S&P 500 as we’ve been assuming $150 for “normalized EPS,” and willing to assign a 20x PE multiple during this time of extraordinarily low interest rates. Without considering the question of valuation, stocks have rallied beyond that level without pause.
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® – OSJ Supervisor
1-Morningstar Direct 6/22/20
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.