Bad News Bear

Bad News Bear

April 6, 2020

I don’t know about you, but I feel like we are looking to stabilize. What the heck do I mean by stabilize?  Well, I think we’ve digested a lot of the news and data, and although we are seeing massive increase in numbers day over day/week over week, they are coming within the range that the market has already digested.

When the bad news is fully recognizable to all, you are closer to a bottom. The market is the ultimate pre-pricer of all commonly known things. Now something else could come at us that we don’t expect, and oil price war has potential to take us for a ride…this one I’m watching closely.

Now although I understand that no one can predict with any uncertainty what the ultimate death toll will be, the President publicly recognizing this number may be between 100K-240K set an expectation for the market. We added another 6 million to unemployment last week and I believe the market understands this number is light. 

To ultimately get back to stabilization, we will need to wait till the data starts to peak. We took care of the major issue for a disruption to markets which is liquidity. The Treasury now has flexibility to lift up to $4 Trillion in relief packages from the original $2 Trillion. If the money flows, the markets can operate under normal conditions. And yes, big/swift declines like what we’ve seen, are normal, albeit gut wrenching.

The big difference that I feel about this bear market as opposed to previous is that we all feel that there will be an end, and we will return to prosperity. In previous bear markets you hit a bottom in pricing when the sentiment is, “This is never going to end”. The market term for this is capitulation. We haven’t seen it this time and I’m not sure that we will. 

I’ve told you previously that I’m a big proponent of Reversion to the Mean. I don’t think there is much that we will experience in the future that we haven’t already been through. When I equate that to earnings and particularly earnings growth, we can come up with an average year over year number. I love these charts as it gives you a trend line and although we’ve been through periods of great distress, we ultimately figure it out and it’s freakish how we get back to that trend line.

If we use the above graph from 1985, the average growth is at 6.9% compounded. That would give you a 2020 earnings number $160.85 applying an annual compound rate of 6.9%. Now it’s likely that due to shutdowns earnings will be compressed in 2020. Even in normal times, trying to forecast a point in time is impossible, but adding on our current circumstances, I think you’d have to be an egomaniac to attempt it.  

Taking a longer look you will see that that using a 6.3% compounded rate from 1954 also has the average of earnings to $160. What I want you to take from these graphs is that if earnings come in below this, it just means that we have a greater potential in the future.

So now we are in April, it’s earnings time again. This will probably keep volatility high for the next few weeks, and that’s a good thing for a portfolio manager looking for value. I expect the guidance from companies in this quarter to be very bearish. If you’re a company CEO, it’s a great opportunity to set a low expectation and beat in the future. Now you have the perfect storm to be able to take the earnings hit and get yourself ready for the rebound. This should be a very interesting time.

I’m looking forward to going through portfolios with everybody in the coming days and weeks. Yes, it’s ugly, however understanding the what and how, will give you some insight the plan from this point. If you haven’t emailed Lori already with your preferred time to talk, please reach out to her at lori.claro@raymondjames.com

Stay safe, and I’ll talk to you soon.

Buy/Sell

Any opinions are those of Mick Graham and not necessarily those of Raymond James.  This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.   The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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