Weekly Snapshot May 18, 2020

Market Review: Week Ending 5/15/2020

US equities took a breather last week after a stunning rally off the March 23 bottom, as heavyweight investors Stanley Drunkenmiller and David Tepper commented on what one called “the worst risk/return setup in my career” while the other spoke of the “total disconnect between the stock market and economic reality.”1 Fed Chairman Powell’s dire commentary on his view of the likely recovery was another catalyst for the modest 2.3% fall in the S&P 500 Index, which ended the week at 2863.1 Fixed Income markets continue to express a different view of the likely recovery than the more optimistic equity market, as the 10-year Treasury Bond fell to 0.64%, close to the same level seen in late-March.1 Economic releases, Retail Sales (down 16.4% m/m) and Industrial Production (down 11.1% m/m) were predictably awful – the fall in Industrial Production was the steepest one-month fall since records have been taken for over 101 years.1 3m more jobless claims were filed, bringing the 8-week total to over 36m, or more than 21% of the total US labor force.1 Perhaps the one glimmer of good news was an uptick in the University of Michigan’s Consumer Sentiment Index, though it rose only slightly, to 73.7 from last month’s all-time low of 71.8.1 FactSet recorded a record 29% decline in Q1 S&P 500 earnings, and the full-year EPS estimate was lowered to $125, down from the $165 earned in 20191. Now in the teeth of the economic decline, Q2 GDP estimates hover in the negative 30-40% range for most Wall Street economists, an unprecedented (but expected) collapse.1 With states 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. Early indications of consumer behavior in Wisconsin following that state’s Supreme Court overturning the shelter-at-home mandate is not encouraging. Through the close Friday, year to date results for the major indices are as follows: S&P 500 -10.7%, Russell 2000 -24.3%, MSCI EAFE –20.8% and Bloomberg Barclays Aggregate Bond 4.9%.2

What We’re Watching in the Week Ahead

  • Trade Tensions – The Trump Administration’s comments regarding American investment in Chinese companies and restrictions placed on China’s Huawei Technologies to semiconductors from US companies elicited a response from Chinese officials, raising the risks of a return of trade tensions, a potential roadblock in the expected economic recovery from Covid-19.1

  • Company Announcements – J.C. Penney filed for Chapter 11 bankruptcy last week, joining fellow retailers Neiman Marcus, J Crew and Stage Stores. JCP fought an uphill battle for many years, with Covid-related closures being the final straw for the company, which still has over 800 stores and $10B in sales last year.1 Similar outcomes are likely for other retailers or energy companies and more announcements of dividend cuts or eliminations are likely.

  • 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 5/18/20
2-Factset 5/18/20

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.