Top Weekly Themes
- Reopening for Business: During the latter part of the first quarter many states locked down large segments of their economies to slow the spread of the COVID-19 virus. Thankfully, those efforts were extremely helpful, with the loss of life in the United States to-date coming in much lower than the most dire predictions. With new cases tailing off in parts of the country, many states are now taking steps to reopen for business –if only in phases and with added precautions. As the economy starts to inch its way back to normal, this raises two very real and interrelated questions, both of which should at least begin to be answered within the next few weeks. First, will this prompt a spike in the number of new virus cases such that the reopening process needs to be slowed or reversed? Second, how swift will the economy return to some sense of normalcy? We would argue that few, ourselves included, have any great clarity on either issue. Like science itself, the proof will be in the data as it arrives. That said, we will obviously be closely watching and monitoring both of these dynamics. At least at present, the recent action within the equity markets seemingly has an optimistic take on both fronts.
- United States Financial History 101: On the first Saturday in May Berkshire Hathaway held their annual meeting in Omaha, NE. This event has been dubbed the Woodstock for Capitalists. In years past, the gathering spanned multiple days, and drew tens of thousands. This year, the meeting was held only virtually, with just Warren Buffett and Greg Abel representing the company for a truncated affair. During the first hour of the event, Buffett conducted a history lesson covering both the financial successes, and challenges overcome by this country since 1789. By his math, the wealth of the nation has increased roughly 5,000-fold (after inflation) since that date. While the near term may be clouded by the current uncertainty, his message was unwavering: “Never Bet Against America.” For long-term equity investors, we could not agree more.
- S&P 500 Earnings Estimates: According to FactSet, Inc., the companies within the S&P 500 earned $162.07 during the calendar year 2019. For this year, the consensus estimate calls for a virus induced decline all the way to $130.05 (over 19% lower than the prior year). Looking out to 2021, however, analysts are currently estimating earnings for the Index of $165.28. Were this figure to prove accurate, it would represent not only a full recovery, but an all-time high in profits (and equate to a P/E of 17.2x using the current Index price). Historically, it has taken 3 years for the S&P 500 EPS to exceed the prior peak after a recession. While we have little doubt that 2021 will show a sharp increase in year-over-year earnings, given our take on the recovery in employment (discussed below), we believe it is likely that actual earnings for next year will fall short of current estimates.
|Equities||Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||(3.0)||(20.9)||(11.9)||0.9||21.1||3.16|
|Russell 1000 Growth||0.9||(0.5)||14.1||54.8||87.0||1.14|
|Bloomberg/Barc US Aggregate||(0.2)||4.8||10.4||16.4||21.0||1.33|
|Bloomberg/Barc US High Yield||0.5||(8.3)||(3.5)||6.3||19.1||7.93|
|Bloomberg/Barc Muni Bond||0.9||(1.0)||2.6||11.0||17.6||2.08|
|Bloomberg/Barc Global Agg. Ex U.S.||(1.1)||(1.7)||2.4||8.1||11.3||0.87|
|Crude Oil (WTI) ($/bbl)||25.0||(61.4)||(61.6)||(49.0)||(60.0)||23.6|
|Natural Gas ($/mmbtu)||(2.8)||(13.5)||(25.3)||(42.0)||(30.7)||1.9|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
As of May 7, 2020 (close)
*Dividend Yield For MSCI EAFE and MSCI EM are from 3/31/2020.
Chart of the Week
In the past we have discussed the huge spike in initial weekly unemployment claims, which have averaged over 5 million during the last few weeks, up from roughly 1.7 million per week earlier this year.
The cumulative result of these claims arrived Friday morning when the Department of Labor announced that the unemployment rate at April month-end had vaulted from the prior month’s 4.4% to a staggering 14.7%. For comparative purposes, the high-water mark during the Great Recession was 10%.
This figure was hovering around 50-year lows early this year, and within just a few short months, now stands at levels last seen during the Great Depression.
Admittedly, this is a function of a conscious decision to effectively close large segments of the economy, and not the result of a deterioration in underlying business conditions. Further, the U.S. Government and the Federal Reserve have gone to great lengths to mitigate the impact of the shutdown. Still, while the actions by our Government have obviously reduced the long-term impact of the shutdown, there has clearly been a great deal of damage inflicted on businesses and consumers that will take time to fully repair.
As noted, we, like others, do not have great clarity as to what the exact road to recovery will look like for the U.S. economy. The list of things that will influence this is long, including potential medical breakthroughs, changing consumer behaviors, and increasing virus cases brought on by the reopening of the economy. We realize some would argue “it is different this time” given the self-induced nature of the downturn. We, nonetheless, believe it is useful to look at history for a possible path back to a full recovery –particularly from the perspective of employment.
As the chart above displays, from an employment standpoint, the road to a full recovery after a downturn has not been measured in quarters, but instead in years. Looking at the last two downturns, the quickest path to a full recovery was 48 months. Even if that timeframe were to be cut in half, it would be early 2022 before employment fully recovered. With consumers being the engine of the U.S. economy, and spending largely a function of employment, to us, the path back to peak earnings using this historical context seems a bit longer than what analysts are currently estimating.