“Pay attention, and always take what the market gives, do not fight the tape or the Fed” — Paul Ebeling
After rising about 4.4% from the end of Y 2019, the S&P 500 index SPX, dropped 34% from February to March.
The market supported by the Trump Fed’s asset purchases and loans helped stocks recovered by August. In this digital age, Bear markets and recoveries can and do happen Faast.
Individual stock investors did not panic. Most stayed the course and avoided the temptation to try to time the market. Especially those invested in broad index funds and ETFs, while keeping an emergency reserve in cash and fixed-income securities.
Corporate profits took a hit but investors appeared focused on the V-shaped recovery.
The economy may take several yrs to fully heal but while this is a sad note for inequality, the business failures are disproportionately concentrated among small businesses.
Corporate profits are expected to rise 44% Y-Y in Q-2 Y 2021, according to FactSet.
Currently, the S&P 500 is selling for 35X earnings well above the 25-yr moving average of 26X and implies an equivalent interest rate of only about 2.8%.
However, the benchmark 10-yr Treasury is yielding is less than 0.8%. That is well below the historical average and the Trump Fed is committed to keeping interest rates low. As stocks compete with bonds, this implies a sustainable PE/R closer to 30.
Gold has done exceptionally well this year, but historically its price has been more volatile than stocks. Once all the drama of election-year politics passes and vaccines are approved for distribution, I do not see more big gains there.
Overinvesting in real estate is a poor solution too. Over the past 25 yrs, the average return on residential real estate in the 10-largest metro areas was 4.5%. Including dividends, it was 11.8% for the S&P 500.
Forecasters are looking for the economy to gradually heal in Ys 2021 and 2022 and for corporate earnings to recover.
A 44% rise in corporate earnings for Q-2 Y 2021 implies a PE/R for the S&P 500 of 23 at current prices.
The Bottom Line
Stocks will be undervalued once we have at least 1 vaccine and the recovery goes into its next phase. Investors should look beyond the of the virus chaos during next few months and stick with stocks.
A note from Economist Bruce Barren: “As professional investors are well aware, stock markets usually perform better under Democrats than under Republicans in post-Presidential elections. That’s a well-known fact, but it does not imply cause and effect, says Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania.
“Interesting to note and supportive of this, from 1952 through June 2020, annualized real stock market returns under Democrats have been 10.6% compared with 4.8% for Republicans.
“This might be especially true following our recent President election even though the outcome has yet to be confirmed. Added to this, is that the past 2 recession affected years due to the pandemic have dramatically affected the stock market. Corporate earnings are materially down due to the uncertainty of a vaccine along with unemployment but a potential vaccine by pharmaceutical giant Pfizer seems to be on the horizon and employable for distribution in late 2020 and 2021. This should be a tremendous stimulus to Consumer Confidence Index which is a known driver required for economic recovery.
“Given this current week do not be surprised if the stock market will continue in a positive mood, but the forthcoming Christmas season will be the true indicator, with e-commerce replacing retailer buying as the economic driver to our recovery. There are also solid indicators that pent-up buying is alive and well, based on the overall consumer’s need for a change to a more positive mental economic attitude.”— Bruce WD Barren, an often editorial contributor to Live Trading News.
Just In: A Note from JPMorgan
JPMorgan says it expected the S&P 500 index to hit 4,000 points by early Y 2021, that is +28.57% from Tuesday’s close at (3545.67), and called Pfizer Inc.’s COVID-19 vaccine update “one of the best backdrops for sustained gains in years, after a prolonged period of elevated risks: global trade war, COVID-19 pandemic, US election uncertainty, etc., the outlook is significantly clearing up, especially with news of a highly effective COVID-19 vaccine,” — JPMorgan said in a note to clients.
Pay attention, and always take what the market gives, do not fight the tape or the Fed.
Have a healthy day, Keep the Faith!