Aftershock

Aftershock.  Stocks struggled to continue last week’s rally, giving up ground ahead of earnings season.  The energy sector gave mixed reviews to the OPEC+ production cut, which though historic, may not be deep enough to meet shrinking demand.

 

N O T E W O R T H Y

 

What’s in a number?  It’s here! Earnings season.  I would like to say the “long awaited” earnings season, but I think if investors were given the chance to sit this one out, perhaps just maybe, forget this one, a majority would choose to.  Remember that the isolation we are all experiencing really started in earnest just a few weeks ago in March, though it seems like an eternity.  It was at that point when many businesses began to take their big hits.  Of course, certain industries were hit earlier and much harder as air travel, hospitality, and entertainment started to unravel a month prior.  This earnings season will show the first signs of the big pause.  So how important is this quarter’s actual numbers?  I am going to go out on a limb here and say: not really.  To put a finer point on it, next quarter’s will be the ones to watch because it will truly reflect the meat of this epic economic slowdown.  OK, so I haven’t said anything earth-shattering yet… Wall Street always looks forward, attempting to forecast what the future will hold for earnings, the economy, and ultimately stock prices.  Under normal circumstances forecasting the future is no easy task, and in case you haven’t noticed: these are not normal circumstances, making an already difficult job near impossible.  Normally, companies would provide forward guidance for 1 or 2 quarters ahead based on their internal sales forecasts, but the current economic crisis has made that task almost impossible even for the most stable companies.  All we could hope for out of these earnings is some sort of non-numeric guidance.  “Huh?” you ask, “What is that?”  Well, most analysts are well-trained in math and statistics and have put their grammar and literature days on the shelf long ago.  Starting today analysts and investors alike will be listening for adjectives and adverbs.  In grammatical terms, those are considered modifiers and they are used to describe nouns and verbs.  In other words: just how bad is it, or just how comfortable you are with your business prospects.  Yes, that is what analysts are going to be listening for this time around.  Of course, we will also be listening for any anomalies that may have arisen in the past quarter.  As far as real numbers go, I will leave you with this.  At the beginning of the year, the S&P500 forward P/E multiple was hovering just under 20 times earnings.  That was considered to be on the pricey side as the 10-year average is around 15 times earnings.  Then came the pandemic crisis and multiples shrunk, hitting a low of 14 times on March 23rd.  This was the result of the market selloff as the “P” (price) in P/E shrunk faster than the “E” (estimated forward earnings).  Wouldn’t you guess that as the market roared back in weeks that followed, forward P/E multiples have risen back to around 19 times.  Does that mean that equities are overvalued?  Unfortunately, it is hard to say.  We know that the index is richer than its average over the past 10 years, but that would be OK if we expected earnings to be growing really fast in the next 12 months.  Your guess on 12-month forward earnings is as good as anyone’s these days, but common sense tells us that earnings growth will certainly be under pressure for a while.

 

THE MARKETS

 

Stocks came under pressure yesterday after the S&P500 had its best week since 1974 in the prior week.  Investors are anticipating earnings season which begins with the banks today.  The S&P500 fell by -1.01%, the Dow Jones Industrial Average sold off by -1.39%, the Russell 2000 gave up -2.78%, and the NASDAQ Composite Index gained +0.48%, helped by Netflix and semiconductors. Bonds continued their rise and 10-year treasury yield climbed by +6 basis points to 0.77%. Spreads on corporate credits are tightening up as the Fed has stepped in as a big buyer, making them more expensive than they were a few weeks back.

 

NXT UP

 

– St. Louis Fed President James Bullard, Chicago Fed President Charles Evans, and Atlanta Fed Boss Raphael Bostic will all speak today.

– The great earnings debate will start today as we hear from Johnson & Johnson, JP Morgan Chase, Fastenal, and Wells Fargo before the bell, while Howmet Aerospace will announce after the close.

– The International Monetary Fund will release its April World Economic Outlook today.

 

daily chartbook 2020-04-14