Coronavirus Update – Part 1
On February 19th, Mike Gottschall turned 1 years old. It was a joyous day. He had his first bites of cake, he got new clothing from his grandparents, and everyone was happy. On top of that, the S&P 500 stock index also hit an intra-day all time high of 3,393.52, so his dad was especially happy. The Corona Virus was a somewhat buried news story, and we even threw a big party for him a few days later. Little did we know that was the last large gathering of friends and family we would all attend for a while.
As the virus started to spread around the world, equity markets, being leading indicators, sold off in one of the sharpest, fastest, declines we’ve ever seen, with the S&P 500 falling 35% to a March 23rd intra-day low of 2191.86. Soon after, certain parts of our economy started to close, and most all of us were relegated to a life at home. Many of us had to learn to cook again, parents had to learn how to teach long division, and we all learned about the deeply disturbing yet entertaining life of the Tiger King, Joe Exotic. While the lack of human interaction with our friends and family has been difficult, I think one lesson learned is that we know we can get by with less, at least for a short while. That is not such a bad thing.
As the steward of our client’s assets, we try not to get too caught up in worrying about the merits and the logic of the policies that have been put in place. Our job is to be as knowledgeable as possible about what’s going on in the world from a macro-economic standpoint, keep up on current trends and changes in the investment world, tax laws, fiscal and monetary policy, and adapt accordingly. On top of everything we read and hear, we have also made an attempt to talk to everybody we know (we know a lot of people) to gauge a well-rounded opinion of where everyone stands on this entire situation. We have spoken to people young and old that work in different industries, live in different cities, states, or countries, and are at different stages of their personal and professional lives. We have learned a lot, but in general, we have drawn 2 major conclusions on everyone’s opinions:
1) Nobody is right.
2) Nobody is wrong.
The end game solutions and answers to what we are going through are somewhere in the middle, but to paraphrase Lester Bangs in the movie ‘Almost Famous’, it’s going to be a long journey to the middle.
In the meantime, the current state of equity markets has somewhat separated itself from the current state of our economy. As of May 8th, 86% of the companies in the S&P 500 have reported their Q1 earnings. According to FactSet, the blended earnings decline for Q1 was -13.6% year over year. Not unexpected, but also not good. Given the drop in earnings, the current forward P/E ratio (Price/Earnings), a basic valuation measure used to value whether stocks or cheap or expensive, stands at 20.8 on the S&P 500 (as of May 11th). With a 25-year average of 16.35, one would think that this index is overvalued. Maybe it is, but it is also somewhat hard to tell.
As of April 30th, 79 S&P 500 companies had pulled their full year earnings guidance during Q1. We have stated in previous correspondence that equity markets typically don’t perform well when there is no clarity. While it’s not as murky as it was a month ago, there are still a lot of unknowns in terms of the re-opening of the economy, and subsequently certain companies just don’t have enough clarity on the situation to provide a definitive economic and fact based outlook on the remainder of the year. So a current forward P/E ratio may not be totally accurate due to the lack of accuracy in the denominator (E). Simply put, it’s hard to put a valuation on many stocks right now, and we expect a lot of volatility ahead.
Add in the worst unemployment rate (14.7% and probably climbing) since the Great Depression, and one would think we would have the worst equity performance since the Great Depression as well. But here’s where it gets interesting. In the face of horrific Q1 earnings declines, almost 15% unemployment, and no clarity on the future in terms of both corporate earnings and the success or failure of re-opening the economy, the S&P 500 index has rallied almost 30% from its low point in March. How could this be? We will explore more on this and on our thoughts on the future in Part 2 of our Corona Virus Update. Stay tuned, and as always, please contact us if there is anything we can do for you.
Sincerely,
Your Verdi Wealth Management Team