Weekly Snapshot May 26, 2020
Market Review: Week Ending 5/22/2020
The S&P 500 Index rose 3.2% last week, closing at 2955, the highest level since March 6th and 35% above than the March 23 lows.1 News on Moderna’s drug trial showing early indications of increased antibodies in patients boosted investor sentiment, as did increasing talk of a third fiscal stimulus program that is quickly gaining momentum. Monetary and fiscal stimulus measures already passed amount to an estimated 44% of US GDP, the largest stimulus effort in history, allowing investors to look past the current dire economic conditions caused partly by the 14.7% unemployment rate.1 Bond markets played catch-up last week, while yields were largely unchanged – the 10-year Treasury ended at 0.66% – average investment grade bond spreads fell 23bps (to 185bps) and high-yield spreads fell 76bps (to 681bps).1 Within equities, catch-up was also seen within groups that have largely missed the 2-month rally, as the Russell 2000 Small Cap Index rose 7.8% last week, and S&P 500 lagging sectors since Covid-19, Industrials (+7.5%), Energy (+6.9%) and Financials (+5.1%) led the Index last week while the Covid-19 winners, Healthcare (+0.1%) and Consumer Staples (+0.4%) significantly trailed the Index.1 This is an important technical development for equities as a market propped up by a handful of heavily weighted stocks in the Index (Amazon, Microsoft, Apple, Google, etc) is not sustainable. The lack of market breadth is particularly evident in the NASDAQ Index, which is now up ~4% for the year as the 10 largest names in that Index have gained $900B in market cap this year, while the other 2600 stocks in the Index have lost $300B combined.1 Not all news was positive last week, as previous geopolitical hotspots – China/Hong Kong reoccurred with China’s efforts to limit HK’s independence, and with increasingly tenuous US/China relations on matters ranging from trade, limits on US technology, and regarding the cause and support of Covid-19.1 Through the close Friday, year to date results for the major indices are as follows: S&P 500 -7.8%, Russell 2000 -18.3%, MSCI EAFE –17.3% and Bloomberg Barclays Aggregate Bond 5.2%.2
What We’re Watching in the Week Ahead
- States Reopening – With all states now undertaking some degree of reopening, the rates of infection and deaths will be closely watched. An outbreak of infections that results in further shutdowns is not factored into current equity levels and valuations. Consumer behavior in recently opened restaurants, bars, beaches, malls and other places where crowds normally form will be watched for indications of the likelihood of that occurrence, and willingness of consumers to spend.
- 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
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.