Keeping Up

July 12, 2020

With many distractions recently, the markets have been free to float around while associated commentary has been trapped and festering away from this blog space. But let’s look around and see what’s new.

The Virus

COVID-19 is coming under control in Europe, Canada and some other ‘first world’ societies, however the US is an outlier and is suffering an explosion of infections due to primarily social issues.

The realities of social structure will likely be changed for the foreseeable future. The impact on economies will fallout from that appropriately, but those outcomes are, at best, very difficult to predict.

There is a good chance that the movement of people will be severely curtailed for months and even years to come. This will affect migration, employment and leisure certainly, but other areas will also be changed such as supply chains and trade routes. The changes are likely to be stunning.


There is a good chance that nobody reads this blog for insights into politics, but the geopolitical forces are increasingly difficult to ignore. The current president of the US is either trying to tank the country’s political and economic system or is a moron. This is emboldening tyrants around the world.

At the same time, nations with less capability either economic, social or military are suffering consequences of their weakness from without and within.

The net effect of this is increasing uncertainty. In some parts of the world this can be easily identified as risk to people and property (Syria, Yemen, Sudan, India/China), but in others (Hong Kong, USA), it is more subtle despite apparent dangers.


This all leads to the paradox that is a constant here. What is going on with the market? Here is a chart of the S&P500.

The S&P 500 Over The Past 14 months

There isn’t a lot of annotation on this chart, but note that the current level of 3,185 is the same level as late February, as well as just before Christmas 2019. The world doesn’t look anything like it did back then. Here was the leading headline from December 16th.

“US-China trade deal paves the way for markets to go higher” – That deal is not going as planned. Here is the headline from this weekend: “Trump says US-China relationship is severely damaged…Not even thinking about a phase 2 deal”.

As equity prices have risen, many measures are used to justify the rise. Improving trade with China is one of them, but so are others such as improvements related to COVID-19. Here is a chart of infections as of this morning . . . from Bloomberg’s tracker [Click on the chart for the latest, it’s updated 3-4 times a day]. Perhaps some of the justifications are not so justified (in fact I track many of them and virtually none of them align).

This leads to the real worry about market valuation. Earnings are set to tumble for many companies. Of course, some will be just fine, but many companies will not. For the companies that are not doing so well, many are notably private companies where the true devastation is not measured by daily fluctuations in equity prices. Those effects will take months or quarters to filter into the stock market as the economy slows.

For the largest publicly listed companies, those in the S&P 500, last year during the 2nd quarter, those companies earned $34.95 according to data shown on YCharts. The current estimate from the same place is for Q2 2020 to come in at $34.06, down just $0.92 or 2.5%. The P/E Ratio is currently at 23 times earnings. A valuation that is stretched by any measure.

Another data source, Yardini Research published an estimate on July 6th for Q2 earnings at just $20.00, down about 50% on the year, and that compares to a published consensus of $23.16. The YCharts and Yardeni estimates are vastly different, but Yardeni’s numbers compare favorably to data published by FactSet on July 10th. They suggest a decline of 44% in earnings for the second quarter.

To be sure, there is some hope that things are not so bad. In fact that same FactSet report shows that of the companies reporting so far, 15 of 19 have posted a positive earnings surprise and 14 of 19 have posted a positive revenue surprise (although it is likely that many of these companies will have already reduced estimates dramatically so that they can ‘beat’ the estimate).

The coming week will bring many more reports but it is unlikely that the news is going to get better. Banks are expected to struggle, many retail organizations will have difficulties and of course oil and gas has been hammered for the past quarter. By contrast, some transportation firms (think Fedex), drug companies and trading houses will have done well with significant increases in trading activity.

What does this all mean? Well, stocks are too expensive. Below is a chart of the historical P/E ratio for the S&P 500. It has rarely been so high, and often retreats from those highs during troubled times. It is worth noting however that the tax cuts since President Reagan and even more recently enacted by the current president, alter the earnings and that has pushed up equity prices. (This is a fundamental reason why the rich are getting richer and equity prices are way ahead of the economy.)

The other side of these arguments of course is that the stock market is the only place you should put your money! If taxes are so low for companies and investors, put your money into the stock market and maximize your returns . . . right! Well, yes, unless you believe that the system is unsustainable. This blog has been on that subject since it started, but won’t be defended here.

The last piece of evidence I will review here, is that things are not so great is the employment situation. Last week all the headlines trumpeted the 4.8 million jobs gain for June and the drop in unemployment to 11%. Again, this all sounds like good news, but here is a historical perspective on the unemployment situation. The chart below is the continuing claims for unemployment, with a long term perspective (from mid-2006 onward) the damage to the US economy is stark. With about 18 million people still claiming unemployment, almost three times more than the very worst of the Great Recession of 2008/2009, the repercussions will be long lasting.

As well, there were 1.3 million people making initial claims for unemployment in the last week of June, that is over twice as many as were made during the worst week of the 2008/2009 recession.

It’s pretty bad out there for many people and while they will struggle to live, over 30% of Americans reportedly failed to pay rent in July and that will have long term implications.


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