Will S&P 500 Retest Recent Low By End of April

[Castanza]

An interesting development today was that Janet Yellen went on TV and suggested that Congress should probably allow the Fed to buy stocks at some point:

 

https://www.cnbc.com/2020/04/06/yellen-says-the-fed-doesnt-need-to-buy-equities-now-but-congress-should-reconsider-allowing-it.html

 

This may have scared some bears out of their short positions.

 

Didn't RuleNumberOne call this?

 

He may have. I’m not too surprised but I’m pretty sure this was the first time I heard a Fed insider officially say this.

 

So than the government can exert control on many US companies which is a giant step towards socialism. I said this before, but I think Bernie wins without being nominated.

 

Bingo.

 

I'm more concerned about Joe's VP pick...

 

 

[LC]

I find it pretty ironic.

 

Socialism (as my fellow comrades will know) is based on public ownership of the means of production.

 

Now what Bernie proposed was single-payer healthcare for all; and government-paid college (the two big spending points, at least).

There was never any thought of government actually owning healthcare facilities or colleges.

 

But now during Trump's administration we're hearing about the government directly buying debt and equity of struggling companies?

That is direct ownership by the government of the 'means of production'.

[Fitz]

I have no idea where the SP500 will be by the end of the month but going substantial lower seems reasonable.

 

Prior 12 month earnings for SP 500: $133.89 currently trades at a 20.53 P/E multiple to yield todays 2,748 price tag.

 

A lot of bank and economic forecasting is projecting a decline in earnings and GDP of 30% over the next 9 months and the reasonings that went into that projection seem very possible.

 

If earnings are depressed to $93.72 and the same multiple applies would be a SP 500 price of 1924... Would just have to ask what multiple would be appropriate for declining earnings of the SP 500 at a time with zero percent interest rates.

[winjitsu]

A lot of bank and economic forecasting is projecting a decline in earnings and GDP of 30% over the next 9 months and the reasonings that went into that projection seem very possible.

 

What worries me is this ... literally all you hear about on financial news stations and publications is how bad its going to get ...

 

Which gets me to think ... my thoughts on the prolonged covid impact aren't novel and it's priced in.

 

We're in the Keynesian beauty contest so its about comparing our expectations of "bad" to what's to the market and the herd. I keep on holding out for lower prices, but I wonder if it's a fools errand to try to time this.

[hyten1]

i think this will help  https://www.oaktreecapital.com/docs/default-source/memos/calibrating.pdf

 

 

A lot of bank and economic forecasting is projecting a decline in earnings and GDP of 30% over the next 9 months and the reasonings that went into that projection seem very possible.

 

What worries me is this ... literally all you hear about on financial news stations and publications is how bad its going to get ...

 

Which gets me to think ... my thoughts on the prolonged covid impact aren't novel and it's priced in.

 

We're in the Keynesian beauty contest so its about comparing our expectations of "bad" to what's to the market and the herd. I keep on holding out for lower prices, but I wonder if it's a fools errand to try to time this.

[montizzle]

i think this will help  https://www.oaktreecapital.com/docs/default-source/memos/calibrating.pdf

 

 

Whether I agree with the ideas or not, Oaktree memos are always a good read.

[thowed]

Which gets me to think ... my thoughts on the prolonged covid impact aren't novel and it's priced in.

 

We're in the Keynesian beauty contest so its about comparing our expectations of "bad" to what's to the market and the herd. I keep on holding out for lower prices, but I wonder if it's a fools errand to try to time this.

 

I agree there's no point trying to time this, and I agree with Marks that we should generally drip in once things have gone down.

 

Are things priced in?  Should we hold out for lower prices?  That's a bit harder.  On the one hand: see above.  On the other hand, I can't help thinking back to, say, mid-February when it was pretty obvious that things were going to get ugly, but I didn't do anything because... I figured everybody else knew about it, so it must be priced in.

 

That's slightly how I feel at the moment - we have no earnings guidance to speak of, as it's all been torn up, and a lot of unemployed people at home not spending money.  This is countered with a ton of stimulus.  But it feels almost obvious that earnings for most companies are going to be HIDEOUS, and I'm not convinced that this is priced in, when I look at the level a lot of stocks are at.

[TwoCitiesCapital]

A lot of bank and economic forecasting is projecting a decline in earnings and GDP of 30% over the next 9 months and the reasonings that went into that projection seem very possible.

 

What worries me is this ... literally all you hear about on financial news stations and publications is how bad its going to get ...

 

Which gets me to think ... my thoughts on the prolonged covid impact aren't novel and it's priced in.

 

We're in the Keynesian beauty contest so its about comparing our expectations of "bad" to what's to the market and the herd. I keep on holding out for lower prices, but I wonder if it's a fools errand to try to time this.

 

I don't think it's a fool's errand to wait for more attractive prices if it is seemingly obvious they'll come.

 

The average recession knocks 30% off of earnings. Trailing 12-month earnings for 2019 were $134. With an average recession, we would expect those earnings to fall to $94 meaning we're currently at 29x trough earnings. Even if you expect those earnings to grow, that still sounds incredibly expensive.

 

Now also, ask yourself this. Is a global pandemic paired with a massive oil collapse comparable to an average recession? Or is it likely to be worse because the entire globe is struggling at the same time? My guess is that this will be worse than your average recession and thus even the 29x is reflecting too optimistic of assumptions on earnings.

 

The absurdity of starting valuations is why we are down 20-30% and still very expensive. Dont' try to call the bottom, but don't fear having the patience to wait for fat pitches - which I imagine are much fewer at 29x trailing trough earnings than @ 20x trailing trough earnings.

 

[Fitz]

I love reading Mark's memos! Always very rational. I have spent 30% of my cash pile to date, but feel a reduction in GDP of 20-30% would be very obtainable, and with the amount of operational and financial leverage of companies today that may materialize as much more than 20-30% loss in earnings... After thinking through the shut down more, I just don't think stocks today are as cheap as they look. But given that, they are cheaper than they were 3 months ago both in relative and absolute terms.

[SHDL]

If you are in the mood for a well reasoned bear case this interview may be worth your time:

[changegonnacome]

S&P back at Oct 2019 levels - a mere 6 months ago when the sea was calm and the skies were blue....a pesky little trade negotiation concerning a small fraction of US GDP was giving the markets jitters.....now well there's a global pandemic and the vast majority of the G20 economies are completely closed and facing a public health crisis, confirmed recessions & unprecedented fiscal stimulus meaning huge sovereign debt issuance....either the market was wrong then or the markets are wrong now.

[TwoCitiesCapital]

S&P back at Oct 2019 levels - a mere 6 months ago when the sea was calm and the skies were blue....a pesky little trade negotiation concerning a small fraction of US GDP was giving the markets jitters.....now well there's a global pandemic and the vast majority of the G20 economies are completely closed and facing a public health crisis, confirmed recessions & unprecedented fiscal stimulus meaning huge sovereign debt issuance....either the market was wrong then or the markets are wrong now.

 

Just goes to show "investing is hard"

[wescobrk]

Dow Futures down around 350-400.

We will see if we finally get a down day today.

[vinod1]

Going through Blackrock conf call an interesting tidbit.

 

Bill Katz

Larry, I’m just sort of curious, you had mentioned you've been in contact -- one of the themes on this call is you’ve been in sort of contact with a lot of your clients throughout the quarter, particularly toward the end of the quarter, a lot of moving parts. But I'm sort of wondering if you're getting any sense of how allocation changes may shift here, whether it be on the institutional side or the retail side? And I was wondering if you could maybe answer a question through the prism of maybe asset allocation versus product allocation? Thank you.

Larry Fink

So let me start with that related to the de-risking, risking. And I'm going to have Rob Kapito talk about this too because he's on the frontline of this. Obviously we had vast de-risking from February 21st to the end of the quarter. And much of it was done using indexed products to go in and out of the marketplaces. But our conversations have been very broad in terms of what our clients are going to start inching back into the marketplace. So we had a recent call in the month of April with 750 institutional clients and 75% of that group expressed plans to actively take on more risks and by -- start beginning to buy in dips, while only 5% expressed that they are taking risk off the table. And we're seeing this across the board in our illiquid alternative space. We are actually having deeper, longer, broader dialogues than ever before. Clients are looking -- continue to looking for that. As we showed in sustainability issues, clients are just as interested today despite all the underpinnings of the global economies related to COVID-19. And so I would say, clients have done broad de-risking. They wanted to get their foundation in views. Some of them will be -- had already entered the market. Some of them are going to be waiting because they expect another dip and it really depends on the client's position. We actually have some clients who were needed to sell because of the decline in energy prices. And there are all many reasons where you had not just a de-risking but we have governments who need cash flow and need to spend on that. And so, that's also a thing that has, in my mind that drove -- as oil prices were being driven down, it obviously created an environment where those countries that have been benefiting from rising energy prices and stable energy prices, they were investing dollars and now there they’re into support their economy, they've done other things in terms of using some of their vast savings to support their own economy.

We also expect to see clients continue to look at different equity strategies. In fact, one great client of BlackRock's heard from us about opportunities and they sold a large component of their U.S. government bonds and bought a portfolio of -- a conservative portfolio of dividend stocks, so selling government bonds and going up to a higher yielding asset class with upside potential in terms of beta. So they obviously went from one extreme government bonds to not hyper growth equities, but equities that provide a foundation of higher income than what you could earn in bonds. So, across the board.

 

[mattee2264]

I think a lot of it depends on the market psychology.

 

At the March lows it looked as though the sky was falling. Now there seems to be a light at the end of the tunnel. The curve is flattening. Countries are tentatively starting to re-open their economies. The government and Fed are picking up some of the slack.

 

It is not completely irrational to write off 2020 earnings and even 2021 earnings and look through to a more normalised earnings picture. On that basis you are paying around 20 times earnings which is more than reasonable compared to the pittance you can get on bonds.

 

Where we might start to see a shift in psychology is much later this year if the expected rebound in earnings does not occur or if governments are forced to re-implement lock downs following second waves of the virus.

 

Banks are under pressure to be very generous with credit and the government is being very accommodating with the terms of its financing. No wonder the phones aren't ringing at Berkshire Hathaway!

 

 

 

 

 

[Cigarbutt]

I think a lot of it depends on the market psychology.

 

At the March lows it looked as though the sky was falling. Now there seems to be a light at the end of the tunnel. The curve is flattening. Countries are tentatively starting to re-open their economies. The government and Fed are picking up some of the slack.

 

It is not completely irrational to write off 2020 earnings and even 2021 earnings and look through to a more normalised earnings picture. On that basis you are paying around 20 times earnings which is more than reasonable compared to the pittance you can get on bonds.

 

Where we might start to see a shift in psychology is much later this year if the expected rebound in earnings does not occur or if governments are forced to re-implement lock downs following second waves of the virus.

 

Banks are under pressure to be very generous with credit and the government is being very accommodating with the terms of its financing. No wonder the phones aren't ringing at Berkshire Hathaway!

Hi mattee2264,

This is more a personal note than a response.

In September 2017, you had mentioned: "And if the economy really takes off and people become very optimistic then we could easily see the market go up another 50% over the next 3-5 years which will be psychologically very difficult if you have a high cash allocation."

i just want to say that we are half way through the 5 yr period and plan to comment again (whichever the outcome) in September 2022.

[SHDL]

It is not completely irrational to write off 2020 earnings and even 2021 earnings and look through to a more normalised earnings picture. On that basis you are paying around 20 times earnings which is more than reasonable compared to the pittance you can get on bonds.

 

I hope this line of reasoning turns out to be correct but one needs to be careful because it may not be for a variety of reasons.

 

The biggest concern I think is that companies may lose a meaningful amount of money over the next year or two (i.e., big negative earnings, not zero earnings) and come out of this with some combination of less cash, more debt, and more shares outstanding. Some may go bankrupt.

 

Also the government stimulus isn’t free and will need to be paid for somehow... If it is paid using taxes then it is likely that corporate taxes rates are going back up. If it is paid via money printing then inflation and higher interest rates will likely follow. We may get both.

 

There may also be other structural changes following this crisis that are unfavorable for shareholders. One that seems quite likely at the moment is a massive shift of supply chains out of China. Things like that can not only cost a great deal of money upfront but can also result in a permanently higher cost structure.

[Packer16]

What is interesting here is the debt markets have totally changed in 4 weeks.  The AAA yield is below the YE yields and the BBB yields are only up 58bp since year end.  The Fed put in action.  Even high yield has recovered to about 200bp above YE for BB bonds.  This debt market rally will spill over to stocks.  IMO the real issue is if the shut down lasts much longer you may blow through the initial stimulus.  The key here is psychology. If we can keep a positive attitude here we will be fine but if the attitude becomes worse, which will happen as the shut downs continue, psychology will become the enemy.  It is good sign that there are partial re-openings as this provides more light at the end of the tunnel.  Korea's re-opening is also interesting as it looks like it is almost back to normal.

 

I have been listening to WWII about the defeat of France by Germany in WWII and it sounds like the defeat has as much to do with psychology as with men & equipment.  In this situation, thus is very similar in that psychology is as or more important than the actual damage from the virus.

 

Packer

[no_free_lunch]

I can't really defend the valuation level and sdhl makes good points regarding permanent impairment.  However the feds are printing now like I've never seen before.  You need to account for that as well.

 

How will you preserve your capital if inflation kicks in?  Bonds and cash will get destroyed. Stocks, real estate, gold, maybe crypto will do better. Gold is traditionally the best place to hide but are you going to sink your life savings into that or crypto?  So you have real estate and equities.  Right now there are movements springing up to not pay rent and laws against evicting tenants,  I don't see how real estate is much safer than stocks.  I just keep coming back to a lack of alternatives to preserve wealth or you could say I buy equities out of fear not greed.

[Spekulatius]

It is not completely irrational to write off 2020 earnings and even 2021 earnings and look through to a more normalised earnings picture. On that basis you are paying around 20 times earnings which is more than reasonable compared to the pittance you can get on bonds.

 

I hope this line of reasoning turns out to be correct but one needs to be careful because it may not be for a variety of reasons.

 

The biggest concern I think is that companies may lose a meaningful amount of money over the next year or two (i.e., big negative earnings, not zero earnings) and come out of this with some combination of less cash, more debt, and more shares outstanding. Some may go bankrupt.

 

Also the government stimulus isn’t free and will need to be paid for somehow... If it is paid using taxes then it is likely that corporate taxes rates are going back up. If it is paid via money printing then inflation and higher interest rates will likely follow. We may get both.

 

There may also be other structural changes following this crisis that are unfavorable for shareholders. One that seems quite likely at the moment is a massive shift of supply chains out of China. Things like that can not only cost a great deal of money upfront but can also result in a permanently higher cost structure.

 

I have come to the conclusion that the stock market is also as much about psychology than fundamentals ,especially lately so. I do agree that the Fed has made a big difference on the high yield /junk bond markets. I could tell the difference of the Fed bazooka right away, because bids were noticeable changed after this was announced on differnt stuff that I was looking at (midstream dent, REIT preferred’s).

 

Now how to predict the psychology of the masses is another question.

[TwoCitiesCapital]

The trouble I have is the uncertainty. The stock market SEEMS to be reacting to liquidity and has certainty of a quick recovery, but is overlooking ALL of the risks - many of which are likely more probable outcomes.

 

Things like:

 

1) Fed intervention works and now we get inflation of 4-5% a year which will still wreak havoc on 60/40 portfolios as both stocks and bonds adjust (probably our best case scenario)

 

2) No vaccine is developed for 1-2 years, and we have rolling outbreaks and potential shutdowns in the interim wrecking corporate profits through 2022 with no immediate recovery in site

 

3) getting the virus once may not preclude you from getting again - and the small data from people who've had it twice suggests second time is worse. Maybe a far deadlier second wave just like Spanish Flu pandemic

 

4) Vaccine gets developed in the next 6-12 months, but like the flu vaccine, may not guard against the appropriate strains of the virus as it mutates and you still have rolling outbreaks

 

5) we reopen too early and get a second peak

 

6) Fed intervention was NOT enough and we still have 10+% unemployment when this all settled down

 

7) what pays for all this stimulus and deficit spending? Higher personal and corporate taxes in the near future?

 

8) Long-term effects of COVID-19 are unknown, but there is beginning to be data that suggests the damage done to respiratory systems, even in mild cases, is more damaging and lasting than previously thought. This could mean that it's not just old people @ risk and it's not just a one-and-done thing. Also could mean that people are FAR more cautious about gathering in the future even after closures are lifted if they feel they're personally at risk.

 

I'm not saying ALL of these will happen. But if even ONE of them happens, the S&P @ 2800 and 17x it's trailing peak earnings is likely FAR too high of a price to pay to equities in general.

 

Sure, find your individual deals that are cheap, but a falling tide will lower most boats so I'd just rather wait until the ride is out to being decent valuations in general before I start loading up.

 

 

[Cigarbutt]

...

The key here is psychology.

...

I have been listening to WWII about the defeat of France by Germany in WWII and it sounds like the defeat has as much to do with psychology as with men & equipment.  In this situation, thus is very similar in that psychology is as or more important than the actual damage from the virus.

Packer

Just in case you're interested, this is an interesting book:

https://www.amazon.com/Strange-Defeat-Marc-Bloch-ebook/dp/B07K4T4XJT/ref=sr_1_1?dchild=1&keywords=strange+defeat+bloch&qid=1587314941&sr=8-1

Summary: One participant with boots on the ground experience who made some conceptual connections and who paid a high price to be on the right side evaluates the reasons for the fall of France. He comes to the conclusion that morale is critical but one of the inputs to populace morale is the quality of leadership and the capacity to define united interests.

[wescobrk]

The trouble I have is the uncertainty. The stock market SEEMS to be reacting to liquidity and has certainty of a quick recovery, but is overlooking ALL of the risks - many of which are likely more probable outcomes.

 

Things like:

 

1) Fed intervention works and now we get inflation of 4-5% a year which will still wreak havoc on 60/40 portfolios as both stocks and bonds adjust (probably our best case scenario)

 

2) No vaccine is developed for 1-2 years, and we have rolling outbreaks and potential shutdowns in the interim wrecking corporate profits through 2022 with no immediate recovery in site

 

3) getting the virus once may not preclude you from getting again - and the small data from people who've had it twice suggests second time is worse. Maybe a far deadlier second wave just like Spanish Flu pandemic

 

4) Vaccine gets developed in the next 6-12 months, but like the flu vaccine, may not guard against the appropriate strains of the virus as it mutates and you still have rolling outbreaks

 

5) we reopen too early and get a second peak

 

6) Fed intervention was NOT enough and we still have 10+% unemployment when this all settled down

 

7) what pays for all this stimulus and deficit spending? Higher personal and corporate taxes in the near future?

 

8) Long-term effects of COVID-19 are unknown, but there is beginning to be data that suggests the damage done to respiratory systems, even in mild cases, is more damaging and lasting than previously thought. This could mean that it's not just old people @ risk and it's not just a one-and-done thing. Also could mean that people are FAR more cautious about gathering in the future even after closures are lifted if they feel they're personally at risk.

 

I'm not saying ALL of these will happen. But if even ONE of them happens, the S&P @ 2800 and 17x it's trailing peak earnings is likely FAR too high of a price to pay to equities in general.

 

Sure, find your individual deals that are cheap, but a falling tide will lower most boats so I'd just rather wait until the ride is out to being decent valuations in general before I start loading up.

 

I'm in agreement as well. There is an article on WSJ this morning about S&P shorting increasing from $40 billion to $68 billion.

In the United States, the testing isn't where it needs to be. Another factor is not even the testing but the accuracy of the testing. I've been reading the false negative rate is 30%.

 

A 2nd shutdown in at least some of the states in the United States seems a high probability.

 

I have no idea if we retest the lows but at a minimum there has to be a long time of us staying in a sideways band. The higher the market goes then the bigger the drop will be when the market finally resets.

There is a NY Times article this morning predicting we will see surge in new cases from states opening up like Florida and in other countries that are reopening in about 3 weeks.

Perhaps in May is when we retest the lows or at least drop 15%.

[vinod1]

The trouble I have is the uncertainty. The stock market SEEMS to be reacting to liquidity and has certainty of a quick recovery, but is overlooking ALL of the risks - many of which are likely more probable outcomes.

 

Things like:

 

1) Fed intervention works and now we get inflation of 4-5% a year which will still wreak havoc on 60/40 portfolios as both stocks and bonds adjust (probably our best case scenario)

 

 

I think the problem is quite the opposite. We will see very low inflation or deflation.

 

To get inflation

 

1. You need companies to be rising the prices for goods/services because of an increase in demand for those goods/services.

 

2. You need people whose wages are increasing rapidly because there is a shortage of workers.

 

You need both 1 & 2 to get inflation.

 

Do you believe there is going to be a spectacular sustained rise in demand for goods/services and a massive growth in employment? Not for a quarter or two but for years.

 

Vinod

[no_free_lunch]

Vinod, I think you need to extend point 1.  You need companies to increase prices because demand exceeds supply.  In normal times that means an increase in demand.

If supply gets cut due to say a global pandemic you can also meet that condition.