Just the Facts
Daily Covid-19 deaths have been cut in half over the past six weeks but remain elevated. Miles driven and retail purchases have clearly troughed and should improve further as the economy reopens. Earnings projections for the S&P 500 are expected to hit $125 for 2020, $150 for 2021, and $165 in 2022; roughly equaling the earnings of 2019. The past three recessions have taken 3+ years to regain peak earnings per share. High fixed-overhead businesses are getting hurt the most. Technology and non-cyclical businesses are holding up. Earnings projections for the S&P 500 are expected to decline approximately 39% in the third quarter and 34.5% in the fourth quarter of 2020. All four quarters of the S&P 500 in 2020 are expected to see negative margin growth.
Supporting this mess is the Federal Reserve which continues to buy bonds, thereby keeping interest rates low, the yield curve steep, liquidity high, and asset purchases high. This all supports the markets’ recent advances, even in the face of some 40 million Americans filing unemployment claims. There are 165 million Americans in the labor force. The weak current demand, lower oil prices and excess inventories are depressing expected inflation over the next two years. Housing starts and the homebuilders surveyed both reflect substantial stress. Price-to-earnings multiples are currently stretched at 21.6 times earnings. When multiples are elevated, they tend to constrain annual returns, though yields on many fixed-rate investments net of tax and inflation are negative.
Historically, depressed yields have coincided with depressed price-to-earnings multiples but that is not the case today. Short-term treasuries traded with negative yields in mid-March and remain depressed today. These rates are expected to remain low. While still elevated, volatility has declined recently. Returns do tend to be above average when volatility is elevated.
In recent weeks investors have moved well past the point of no return with respect to Covid-19 and its potential to have an enduring, multi-year impact on the markets. Now the world’s central banks have supplied trillions of dollars of bond buying in order to stimulate consumer activity, even as the same governments shut down the same economies to reduce the spread of the pandemic. Therefore, we are left with a strong new world in which FOMO (fear of missing out…of the rebound) has married TINA (there is no alternative…to stocks). This marriage has the early signs of giving the Federal Reserve what it wants, inflation. Though no inflation has shown up officially, the bond market is in want of signaling the time to sell bonds. I say in want of signaling because the Fed continues to buy bonds, artificially depressing yields. Nevertheless, several bond sectors are now the worst-performing ETF sectors over the last four weeks, providing negative returns. Yet, in fact, negative returns are in place after tax and inflation as the 10-year treasury now yields less than one percent. Could it be that sideline money
is ready to go into the market includes short-term bond money? If so, there is a reason for this unreasonable rally in the stock market. Bond investors, short-sellers and rebound wannabes are being forced into this stock market.
Vaughn Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De la Playa
La Jolla, CA 92037
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0249.