Stocks have defied expectations and rallied strongly since hitting a low on March 23rd. When “everybody” thinks the stock market is going to do this or that, it seems more often than not that it does not do what everybody expects it to. As of yesterday, the mega-cap S&P 500 is only 5% below its all-time high set back in February and is virtually unchanged from where it started the year.
Judging by this, one might think that our economic recovery coming out of the coronavirus lockdown will be V-shaped, meaning a quick return to where things were pre-virus. Broader measures of the stock market’s health paint a slightly less rosy picture as these are down year to date in the range of 7-12%. Thankfully, this is still a vast improvement from where stocks stood in late March.
I said in my quarterly letter on April 9th that I felt economic and earnings reports would be meaningless for awhile and that financial markets would be more concerned about whether or not the virus situation was improving or getting worse. I believe investors now need to consider more closely the outlook for the economy and earnings, especially as 20 million people are currently still out of work. Based on Standard & Poor’s projections, operating earnings for the S&P 500 are expected to be 30% lower this year than they were last year. Another measure of earnings projections forecasts a drop of 22%. While I realize the financial markets may be looking past 2020, optimistic earnings projections beyond this year are highly speculative.
In light of the anticipated damage to earnings from the prolonged shutdown of the economy and investor sentiment again becoming overly optimistic, I believe many stocks are vulnerable at current levels. I do not believe we have seen an end to the volatility and have positioned portfolios accordingly. Recognizing that the financial markets may or may not respond as I expect them to, we remain disciplined in investing in accordance with each client’s specific investment parameters. Should the financial markets continue to rally, this discipline should serve our clients well.
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President