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

[thowed]

1) The past page of this thread sounds like an echo of Buffett slowly turning away from Graham and towards Fisher!

 

2) Re: selling Google.  It's frustrating right now, but we don't know what the future holds, and it doesn't seem unreasonable to have sold 'some'. 

 

Consider this conversation taking place at the end of 2019 - a year which was largely multiple reratings rather than earnings.  So if you sold in the middle of the year, you'd be feeling correct but foolish.  By 31 March 2020, not so foolish.

 

 

[Uccmal]

I have been reading through the whole thread.  This has been exceedingly frustrating.  I have taken some realized losses on puts I bought.  I have kept more than enough to hedge any downside for now.  In the meantime I have been buying an assortment of high quality companies that should rebound and some have already. 

 

Recent additions include Canadian Tire, more HD, more V, Sbux, QSR, Aw.un - tsx, More FB, more V, Mcd, Apple, and a couple of other things.  Yesterday I went across the portfolio of ~ 20 stocks and sold 5-10% of everything, and all of Starbucks.  Sbux was back to its value of late fall so I dont see any upside.  I can always buy it back when it readjusts downwards. 

 

I still think we are going to get a second major down at some point, I really don’t seen any reason why this may not happen.  But I am no longer buying hedges or trying to guess the direction.  I am staying to my long term procedure of buying the best companies at reasonable prices.  Every time I drift and get fancy with options I seem to get skewered.  So, Keep it simple. 

[clutch]

I'm not sure if there would be bad news regarding COVID-19 that be significant enough to cause another big crash. It seems like the likelihood of hearing positive news regarding COVID-19 is much higher. This virus seems much more contagious but less lethal than we thought. That's a good thing in terms of many countries reaching some level of herd immunity at which point the number of new cases/deaths will tail off. And any good news regarding treatment/vaccine will provide a tail wind.

 

Having said that, there would be a lot of negative news when we start finding out the economical damage caused by this virus, but maybe this will cause more of a gradual descent than a big crash.

[Mephistopheles]

I'm not sure if there would be bad news regarding COVID-19 that be significant enough to cause another big crash. It seems like the likelihood of hearing positive news regarding COVID-19 is much higher. This virus seems much more contagious but less lethal than we thought. That's a good thing in terms of many countries reaching some level of herd immunity at which point the number of new cases/deaths will tail off. And any good news regarding treatment/vaccine will provide a tail wind.

 

Having said that, there would be a lot of negative news when we start finding out the economical damage caused by this virus, but maybe this will cause more of a gradual descent than a big crash.

 

I think people are under appreciating the following:

1) second wave: people still expect it to go away on its own in the summer and never come back. let's not forget that the 1918 flu had a second wave which was worse than the first one

 

2) that if there is a cure, it may not be easy to manufacture, distribute and administer. Take Remdesevir for example, the market moved up a couple of times because of preliminary research it may be a cure. Not to mention that the trial didn't have a control arm, but let's just say it is significantly better than a control. Even in that case, know that Gilead can only manufacturer several million doses by the end of the year (going on memory). Second, more importantly, it is an IV medication. How many people are willing to get sick and then get hospitalized to receive an IV drug?

 

3) that if we completely 100% open up the world economy, it won't change the fear that is ingrained in people - travel, retail, leisure, entertainment, large events, etc are bound to be effected until there is A) a simple cure or B) a vaccine. These industries are likely to remain in a recession for some time.

[clutch]

I'm not sure if there would be bad news regarding COVID-19 that be significant enough to cause another big crash. It seems like the likelihood of hearing positive news regarding COVID-19 is much higher. This virus seems much more contagious but less lethal than we thought. That's a good thing in terms of many countries reaching some level of herd immunity at which point the number of new cases/deaths will tail off. And any good news regarding treatment/vaccine will provide a tail wind.

 

Having said that, there would be a lot of negative news when we start finding out the economical damage caused by this virus, but maybe this will cause more of a gradual descent than a big crash.

 

I think people are under appreciating the following:

1) second wave: people still expect it to go away on its own in the summer and never come back. let's not forget that the 1918 flu had a second wave which was worse than the first one

 

2) that if there is a cure, it may not be easy to manufacture, distribute and administer. Take Remdesevir for example, the market moved up a couple of times because of preliminary research it may be a cure. Not to mention that the trial didn't have a control arm, but let's just say it is significantly better than a control. Even in that case, know that Gilead can only manufacturer several million doses by the end of the year (going on memory). Second, more importantly, it is an IV medication. How many people are willing to get sick and then get hospitalized to receive an IV drug?

 

3) that if we completely 100% open up the world economy, it won't change the fear that is ingrained in people - travel, retail, leisure, entertainment, large events, etc are bound to be effected until there is A) a simple cure or B) a vaccine. These industries are likely to remain in a recession for some time.

 

I think all of the above are expectations now, not some surprises. There won't be more news like this virus is a pandemic, not something that only happens in Wuhan. Almost every country is infected and dealing with it.

 

Especially the second wave -- I highly doubt anyone right now expects it to go away on its own. At some point, we will decide to live with the virus. The lethality doesn't look that bad if you trust the antibody testing studies.  And it seems like we will reach a herd immunity soon in many areas. Call me an optimist.

[Uccmal]

I'm not sure if there would be bad news regarding COVID-19 that be significant enough to cause another big crash. It seems like the likelihood of hearing positive news regarding COVID-19 is much higher. This virus seems much more contagious but less lethal than we thought. That's a good thing in terms of many countries reaching some level of herd immunity at which point the number of new cases/deaths will tail off. And any good news regarding treatment/vaccine will provide a tail wind.

 

Having said that, there would be a lot of negative news when we start finding out the economical damage caused by this virus, but maybe this will cause more of a gradual descent than a big crash.

 

I think people are under appreciating the following:

1) second wave: people still expect it to go away on its own in the summer and never come back. let's not forget that the 1918 flu had a second wave which was worse than the first one

 

2) that if there is a cure, it may not be easy to manufacture, distribute and administer. Take Remdesevir for example, the market moved up a couple of times because of preliminary research it may be a cure. Not to mention that the trial didn't have a control arm, but let's just say it is significantly better than a control. Even in that case, know that Gilead can only manufacturer several million doses by the end of the year (going on memory). Second, more importantly, it is an IV medication. How many people are willing to get sick and then get hospitalized to receive an IV drug?

 

3) that if we completely 100% open up the world economy, it won't change the fear that is ingrained in people - travel, retail, leisure, entertainment, large events, etc are bound to be effected until there is A) a simple cure or B) a vaccine. These industries are likely to remain in a recession for some time.

 

I think all of the above are expectations now, not some surprises. There won't be more news like this virus is a pandemic, not something that only happens in Wuhan. Almost every country is infected and dealing with it.

 

Especially the second wave -- I highly doubt anyone right now expects it to go away on its own. At some point, we will decide to live with the virus. The lethality doesn't look that bad if you trust the antibody testing studies.  And it seems like we will reach a herd immunity soon in many areas. Call me an optimist.

 

Your an optimist :-).  Actually, I don’t really disagree with anything you have said. 

 

Where I differ is that the economic effects are going to last a long time.  I am not really considering the virus as a factor going forward.  It am expecting something of a paradigm shift. 

 

A huge segment of the population has been living on credit for a long time.  In between this and job loss these people will not be in good shape for a long time, if ever.  If the job loss, and debt repayment, last a few months to a couple of years people will become much tighter with money.  My Grandparents repaired, saved, and never borrowed.  They lived through the GD.  By our standards they were tight with money, even though my GF worked the entire depression (he was a teacher). 

 

Governments can only do so much to ignite spending.  If people develop a healthy fear of debt the economy will take a major hit.  Right now, markets are acting as if everyone will go back to their debt fuelled spending ways as soon as we contain this virus.  I think it may not return for a generation.  Especially if the economy adjusts to having fewer workers.  IMHO. 

[TwoCitiesCapital]

I'd also add that while it does appear it is more contagiouis and less fatal than prior thoughts, there is also the bad news that the impacts of infection tend to be worse and longer-lived than previously believed - even for those with somewhat mild symptoms.

 

Even if it doesnt kill you, long-lived respiratory damage is still enough to cause concern amidst the wider population and would still be a reason to exercise precaution to avoid getting it. Particularly for those who already have respiratory issues (like those with asthma - a large portion of the population).

 

Lastly, I'm no vaccine expert - but is my understanding that vaccines for other COVID family viruses have been exceptionally difficult to crack. I wouldn't expect this one to be any different and it's possible the vaccine is only for the most fatal of the 30+ strains currently in existence as opposed to full immunity.

 

From the mayo clinic:

 

Coronavirus vaccine challenges

Past research on vaccines for coronaviruses has also identified some challenges to developing a COVID-19 vaccine, including:

 

Ensuring vaccine safety. Several vaccines for SARS have been tested in animals. Most of the vaccines improved the animals' survival but didn't prevent infection. Some vaccines also caused complications, such as lung damage. A COVID-19 vaccine will need to be thoroughly tested to make sure it's safe for humans.

 

Providing long-term protection. After infection with coronaviruses, re-infection with the same virus — though usually mild and only happening in a fraction of people — is possible after a period of months or years. An effective COVID-19 vaccine will need to provide people with long-term infection protection.

 

Protecting older people. People older than age 50 are at higher risk of severe COVID-19. But older people usually don't respond to vaccines as well as younger people. An ideal COVID-19 vaccine would work well for this age group.

[buffetteer1984]

What I've come to realized during this whole pandemic is it's almost an impossible exercise to predict what the markets will do on any given day or even months. It's even harder to predict what this virus will do to the markets itself. But I do feel confident enough that buying quality cash flow assets that are durable during this time will reward me in the long run.

[Spekulatius]

So much easier to own great businesses - they have a much better chance of "re-rating" higher.

 

I don't mind owning a crappy business, but I want it to be kicking me back cash at every chance it gets. Betting on Mr. Market to re-value your crap business to a "fair" value is a painful experience.

 

Generally tech has really shown a superior operating model during this pandemic. For example virtually no tech company is shut down, even companies that produce stuff like semiconductor or even semi equipment companies keep operating t while for example automobile is shut down. Of course all the FANG companies are operating and basically trouncing their competition.

 

Tech companies typically flex better and can adjust costs and keep profitable even when volumes are down. This is different than with many industrials , B&M retails stocks etc. The tech companies typically have great balance sheets with little or no debt and plenty of cash.

 

Combine all the above and you just get better performance in any environment.

 

Through my own circle of friends  from my town , I know some folks who work for semi equipment/ automation companies and all of them kept operating. Some of them were starting to prepare their company for the pandemic in late February  as they heard from their colleagues in China what was going on and how to deal with this in case it would reach the US. Quite some foresight and I know they were in daily contact exchanging information and had rearranged their workspace to reduce people density in their US facility by 80% with staggered shifts and everyone who could working from home etc.

 

Compare this to General Motors (which also has a chinese sub) and see the difference. This whole pandemic lets me rethink how I think about “ business quality” a bit and it’s a bit humbling as a value investor quite frankly.

[DocSnowball]

I have a silly question about who the marginal investor is going to be in indexes in the coming months. What is the breakup of sources of money coming into equities esp in the US, and how much of that is corporations, endowments and individuals?

 

When listening in to a couple of institutional investment committee meetings, what I understood is that mid-March when stocks tanked and bonds went up, Wall street money managers recommended rebalancing and bought more stocks. The forecast repeatedly given was of the economy being expected to pick up in Q3 and A4. Possibly a few individual investors also felt the same and bought more, or at least few sold or were forced to sell AFAIK given how quickly markets went back up. Not sure about hedge funds etc who I traditionally think of as the marginal investor.

 

Now, with the second order effects of the virus making it clear that many Universities with endowments will struggle and perhaps even pull some money out, or corporations will struggle and not be putting more into pension funds etc but rather taking some out for the rainy day and for necessary cap. ex.. Many individuals will also struggle, and many others will want more liquidity than usual. So the net money flow from these sources will possibly be out of equities, and it could be drip by drip as the social distancing continues to affect margins even though it won't completely shut things down.

 

Any thoughts? 

[vinod1]

I strongly believe that market gets it right - in the long term. If something is not priced at what I think it should be, say even after 5-7 years, then my assumption would be that I am missing something and do not understand it properly.

 

However, I do not think we can look at what the market does over a short period and infer anything from it. Short term it is complete noise. If you try to make sense of it, you would go insane.

 

In this thread, I can understand why we are perplexed by the market moves. But I think we should just have confidence in our own estimates and to heck with the market. In these times, given the economic uncertanity, there are bound to be bargains galore now and in the future. Just have patience.

 

Vinod

[vinod1]

This figure always cheers me up.

 

Vinod

[SHDL]

What is the breakup of sources of money coming into equities esp in the US, and how much of that is corporations, endowments and individuals?

 

I don’t know how reliable this is but here is an estimate by Goldman:

 

http://www.marketwatch.com/story/buybacks-are-the-dominant-source-of-stock-market-demand-and-they-are-fading-fast-goldman-sachs-2019-11-06

 

Buybacks are almost certain to be down this year so that will be a negative. I think you’re mostly right about the other sources of demand. The key question is will other buyers step in to fill the void. Another thing to keep in mind is that supply might be up this year too if companies are forced to raise equity capital.

 

Making sense of the sharp short term moves like we’ve seen I think is trickier because they tend to be driven by technical factors like forced selling (by certain closed end funds and such in March), short squeezes (which almost certainly fueled the most recent rally), algorithmic trading (which often follow, and thus amplify, short term trends), and such.

[TwoCitiesCapital]

What is the breakup of sources of money coming into equities esp in the US, and how much of that is corporations, endowments and individuals?

 

I don’t know how reliable this is but here is an estimate by Goldman:

 

http://www.marketwatch.com/story/buybacks-are-the-dominant-source-of-stock-market-demand-and-they-are-fading-fast-goldman-sachs-2019-11-06

 

Buybacks are almost certain to be down this year so that will be a negative. I think you’re mostly right about the other sources of demand. The key question is will other buyers step in to fill the void. Another thing to keep in mind is that supply might be up this year too if companies are forced to raise equity capital.

 

Making sense of the sharp short term moves like we’ve seen I think is trickier because they tend to be driven by technical factors like forced selling (by certain closed end funds and such in March), short squeezes (which almost certainly fueled the most recent rally), algorithmic trading (which often follow, and thus amplify, short term trends), and such.

 

I don't know how to reconcile the difference in numbers, but the Economist had a recent article reflecting ~$700 billion of corporate buybacks in the US last year fading to somewhere closer to $250 billion this year.

 

Those are round numbers from what I can recall of the chart, but impact would still be staggering in an an environment where few have the liquidity/cash to step and make a sizable difference in demand.

[DocSnowball]

What is the breakup of sources of money coming into equities esp in the US, and how much of that is corporations, endowments and individuals?

 

I don’t know how reliable this is but here is an estimate by Goldman:

 

http://www.marketwatch.com/story/buybacks-are-the-dominant-source-of-stock-market-demand-and-they-are-fading-fast-goldman-sachs-2019-11-06

 

Buybacks are almost certain to be down this year so that will be a negative. I think you’re mostly right about the other sources of demand. The key question is will other buyers step in to fill the void. Another thing to keep in mind is that supply might be up this year too if companies are forced to raise equity capital.

 

Making sense of the sharp short term moves like we’ve seen I think is trickier because they tend to be driven by technical factors like forced selling (by certain closed end funds and such in March), short squeezes (which almost certainly fueled the most recent rally), algorithmic trading (which often follow, and thus amplify, short term trends), and such.

 

I don't know how to reconcile the difference in numbers, but the Economist had a recent article reflecting ~$700 billion of corporate buybacks in the US last year fading to somewhere closer to $250 billion this year.

 

Those are round numbers from what I can recall of the chart, but impact would still be staggering in an an environment where few have the liquidity/cash to step and make a sizable difference in demand.

 

Thank you both for sharing, this is very illuminating!

[buffetteer1984]

I think some consideration for buybacks is not all buybacks are created equally ie what companies are executing it (apple, google, microsoft still have massive buyback programs and they represent a big portion of the indexes), how well are they doing it (overpaying vs underpaying with the former being a waste of buybacks anyways).  Airlines have stopped their buybacks, but airlines also don't move the indexes as a group.  Then you have banks that have voluntarily postponed buybacks, so this should have a hit. 

[mattee2264]

  I think it is a negative that free cash is gonna have to go into reducing leverage rather than buying back stock.

 

  Through buybacks and tax cuts S&P 500 earnings were able to grow faster than the economy which contributed to the very high valuations pre-crisis. With those factors no longer operative and a good chance that corporate tax rates will have to rise in the future I think the road to getting back to S&P 500 EPS of 160 is going to be a long one and therefore you are paying 18 X peak earnings which may not be achieved again for a few years now especially as you will have to rely more on the numerator than the denominator.

[Kaegi2011]

I have a silly question about who the marginal investor is going to be in indexes in the coming months. What is the breakup of sources of money coming into equities esp in the US, and how much of that is corporations, endowments and individuals?

 

When listening in to a couple of institutional investment committee meetings, what I understood is that mid-March when stocks tanked and bonds went up, Wall street money managers recommended rebalancing and bought more stocks. The forecast repeatedly given was of the economy being expected to pick up in Q3 and A4. Possibly a few individual investors also felt the same and bought more, or at least few sold or were forced to sell AFAIK given how quickly markets went back up. Not sure about hedge funds etc who I traditionally think of as the marginal investor.

 

Now, with the second order effects of the virus making it clear that many Universities with endowments will struggle and perhaps even pull some money out, or corporations will struggle and not be putting more into pension funds etc but rather taking some out for the rainy day and for necessary cap. ex.. Many individuals will also struggle, and many others will want more liquidity than usual. So the net money flow from these sources will possibly be out of equities, and it could be drip by drip as the social distancing continues to affect margins even though it won't completely shut things down.

 

Any thoughts?

 

From the data / anecdotes I've seen retail has gotten into the flow in a big way. 

- Retail accounts have grown dramatically (Robinhood, TD, etc.), wanting to "buy the dip"

- Huge inflows into index ETFs

- Momentum stocks are back (e.g., SPCE...)

 

Historically when this has happened it did not portend good things.  But who knows... When the govt is willing to do anything to prevent extreme events and nobody cares about govt debt, it's party time!

 

Also, side note, it's *extremely* difficult to get money out of a pension plan (at least in the US).  Even if the plan is effectively done (e.g., all participants have died), the excess money sitting in a plan is taxed at 90% when it comes back to the company.  You could theoretically merge pension plans, but that has its own set of complex rules, and you know, who wants to buy a company just for an overfunded pension plan? 

[SHDL]

From the data / anecdotes I've seen retail has gotten into the flow in a big way. 

 

This and the low transaction volume we’re seeing lately makes me think that we’re in a situation now where effectively (a) there is a huge bid-ask spread amongst the big guys because of all the fundamental uncertainties, and (b) the ask is being hit (for now) by these smaller guys. If I’m right about this we are in a risky situation where it won’t take much to start a big drawdown.

[Kaegi2011]

From the data / anecdotes I've seen retail has gotten into the flow in a big way. 

 

This and the low transaction volume we’re seeing lately makes me think that we’re in a situation now where effectively (a) there is a huge bid-ask spread amongst the big guys because of all the fundamental uncertainties, and (b) the ask is being hit (for now) by these smaller guys. If I’m right about this we are in a risky situation where it won’t take much to start a big drawdown.

 

It's interesting as the retail accounts have exploded due to commissions going to zero.  I mean... who knew that a few bucks was preventing such a large number of participants in the market?  Talk about missing the forest for the trees. 

[valueinvestor]

I think we all knew - no? However, maybe it did not register in our minds. A few years ago it may not register in my mind because my sole focus was valuation, but now it's transitioning to market participants and resulting valuations. That's the thing with seeing the forest, depending on how big, you may need to take a tremendous step back to get a full picture - possibly an aerial view.

 

However, it's one of the reasons why I stayed invested, there was a study by Schwab on market participants, but I can't locate it for the life of me.

 

If one can properly ride this train, then you can have the same position as Ackman, where he got a lot of gains for this month that you don't have to care what happens if there's a decline because it won't cut much so your performance this year is red.

[buffetteer1984]

"The only one that gets hurt in a rollercoaster ride (in stocks) are the ones that jump off. Stay the course" - not sure who said this but that's my thinking.  Valuations, retest, support levels...fact is nobody knows.  Nothing is precise.  Just buy quality companies with growth and durable moats when they go down and average over the long term and chances are you'll do amazingly well.

[Gregmal]

Yea its surprised me over the years how many people who invest in the stock market do not grasp several really, really simple concepts that make it all relatively easy and mentally much less taxing.

 

1) the most you can lose is you investment, but you can make many multiples of it(assuming your arent doing more sophisticated stuff)

2) gun to your head, always go with quality over valuation

3) ignore the noise from those who constantly worry about stocks "going down". I see so many people pissing their pants worrying about when the next downturn is. So fucking what? History has taught us that if you have a long term horizon, and buy quality, pretty much all downturns are opportunities.

4) diversify and manage your risk.

 

 

 

[SHDL]

From the data / anecdotes I've seen retail has gotten into the flow in a big way. 

 

This and the low transaction volume we’re seeing lately makes me think that we’re in a situation now where effectively (a) there is a huge bid-ask spread amongst the big guys because of all the fundamental uncertainties, and (b) the ask is being hit (for now) by these smaller guys. If I’m right about this we are in a risky situation where it won’t take much to start a big drawdown.

 

It's interesting as the retail accounts have exploded due to commissions going to zero.  I mean... who knew that a few bucks was preventing such a large number of participants in the market?  Talk about missing the forest for the trees.

 

I think that commission free trading was really just a match that helped start the fire. There is a self-reinforcing element to these things as we all know (some people buy stocks just because their friends/neighbors/etc made good money from them), so the match itself doesn’t need to be that big. What you do need though is a nice pile of wood that burns well — for instance a bunch of stocks that can really get people’s imaginations going (electric vehicles are good, plastics not so much).

[SHDL]

"The only one that gets hurt in a rollercoaster ride (in stocks) are the ones that jump off. Stay the course" - not sure who said this but that's my thinking.  Valuations, retest, support levels...fact is nobody knows.  Nothing is precise.  Just buy quality companies with growth and durable moats when they go down and average over the long term and chances are you'll do amazingly well.

 

I actually think you’re right about this. I’ve posted a lot on this thread but that is mostly because I find this market environment rather fascinating, not because I think people should swing trade the index or anything. Although I will say major drawdowns are something you do have to worry about if you’re retired with a modest nest egg, especially in this zero bond yield environment.