Snapping Back into More Uncertainty

Introduction
Snapping Back into More Uncertainty

Markets rebounded impressively in April, posting one of their best months ever. This rebound off the March lows was able to recover a good portion of the year’s losses, but are we really out of the danger zone? This is a very unique situation as we have a complete lack of fundamentals on which to value companies.

No one knows the exact timing of reopening the economy and how it will play out. It’s never been done before. As such, companies can be forgiven for providing little or no guidance. Earnings season has been more focused on balance sheets to determine which firms have the best staying power and which can outlast the competition.

As a gauge in the dramatic change in estimated earnings, let’s look at the S&P500. In 2019, earnings per share for the index were $150. Expectations for 2020 at the start the of year were around $165. But in the last month, given the virus and resulting shutdown, estimates now range from a low of $90 to $130.

If we take $100, that is over a 30% drop in earnings expectations in one year. If we then look at a situation with the economy in a V-shaped recovery, resulting in 30% growth for the next two years, we get 2021 at $130 and 2022 over $160 (yes, back to what we should have done this year). That is an optimistic scenario, but it still shows more than two lost years.

The next big risks for the market will be late summer and the fall. Everyone is focused currently on when the economy will reopen and most expect a rapid recovery. But what happens if they open and no one shows up? As Yogi Berra once said, ‘if the people don’t want to come out to the ballpark, nobody is going to stop them.’

With so much of the economy shutdown for an extended period and many adjusting to work from home models, there is a very real possibility that the new world won’t be like the old. Even worse, not everyone will be rehired into their old roles. This will take time and no one should expect an instantaneous return to ‘normal.’

Given the lack of fundamentals, technical analysis has played a huge role in this recovery and the biggest debate is ‘to retest, or not to retest?’ In most dramatic sell-offs, you get a sharp rebound (like we saw in early April) but then get a low volume sell-off towards the previous low levels.  This was the case in 2008/09.

One of the more notable exceptions to the trend is the December 2018 sell-off in which the levels weren’t seen again until only a few weeks ago.  What is different this time has been very aggressive and proactive actions by global central banks. Well over $2-trillion of stimulus was enough to offset the first wave of the economic collapse. The direct buying of fixed income ETFs in the market was unprecedented. It’s notable that this is one of the first times central banks have begun easing programs before a recession started.

This begs the question, are central banks out of bullets now? The next and potentially last step for central banks is the direct buying of equities. Who wants to bet against that in an election year? Fiscal programs will be relied upon to avoid that scenario and act as support to bridge the gap for many businesses. However, the length and amount are still unknown.

Given the amount of stimulus, is it any wonder one of the best performing assets this year has been that classic insurance policy of gold?

Everyone should be impressed with the market response in the past month and we hope the economy can survive the shock. We still expect volatility to be the new normal and would look towards the bond market to signal a resumption of normalization in the broader economy. The shutdown and social distancing measures are working. Let’s hope we stay the course to see them through and can start the process of getting back to normal.

By the numbers as at April 30, 2020.

— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments


All data sourced from Bloomberg unless otherwise noted.

The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Author

Greg Taylor

Greg Taylor is the Chief Investment Officer of Purpose Investments. Greg specializes in finding and exploiting pockets of volatility in the market to drive returns.

View Comments
Next Post

Revenant dans plus d'incertitude

Previous Post

What the Markets Are Telling Us About the Rest of 2020 and How to Prepare For It