Morning all.
It was an interesting day in the markets yesterday which potentially saw the recent rally come to an end. Looking at the Dow for example it was 4% up at one point during the day, but closed the day down. Something that’s only happened on a couple of occasions in the past.
The mood picked up a bit overnight though, and I think that once again this was Trump talking their progress up and hinting that the CDC will be releasing new guidelines that will help with the plan of getting people back-to-work. I really wonder if President Trump has been applying pressure on them for something that pertains to his hurried desire to open the US up for business again. Now he has this wedge in the door I think it which be easier for him to push to expand its reach and application.
But I have to take the opposite side of this argument yet again. The US recorded their highest number of deaths in the face of Trump’s ‘cheerleader’ talk, and New Jersey just decided to extended their lock down measures and tighten restrictions further to combat the spread.
With Hong Kong and Singapore extending their lock down measures, plus the state of emergency declaration in Japan, it’s pretty clear that very few are talking about easing measures in the very near future. On the news this morning here in the UK it’s been stated that we should not expect any let-up in our lock down next week when it is due for review.
This means that global economic activity is very likely to be subdued for longer than expected and the follow on from that is that company earnings forecasts are going to have to come down. It also means that the market multiple on the SP500 should not be reflecting strong revenue and earning growth and the P/E ratio of around 20 from February should be more like 15-16 to reflect the increasing prospect of a recession.
The current SP500 earnings consensus for 2020 is about 160. A multiple of 19 gets the kind of year end forecast many analysts have for the index about around 3,000 but this has to be questioned. Without even taking this earnings figure down, just giving it a 16 multiple adjust the forecast to 2,560 which is below current price but still assumes that Q3 will about match 2019 and Q4 will beat 2019. I think some argument could be made for revising both these quarters down as I find it difficult to think that everything will be so good by October.
The recovery since the March lows has been pretty tremendous though and I did take some profits this week into that strength. But I also added a couple more hedge positions with that freed-up capital because I still think this market has to give up some gains during the upcoming earnings season.
The growing unemployment has to effect demand-side economics and that combined with restricted movement around the world is a recipe for weak forward guidance, which should lead analysts to revise down the late-year earnings forecasts.
This is just my opinion. I know it’s a bit negative but I’m struggling to see how economies get back to outperforming last years strong Q4 performance so quickly in light of what we are all dealing with currently.
This is not all bad news though and I’m going to write an article for my blog later hopefully to discuss the re-framing of all this from an investment perspective.
Stay safe, thanks for your time.
$SPX500 $DJ30 $NSDQ100
