After dropping 30% from the start of the year the low in March, the S&P 500 has rebounded 30% off the March 23 low, and nearly 13% in April (Figure 1) to end down roughly 10% year-to-date.
The 10 yr. US Treasury remained largely flat during April, closing the month with a yield of 0.64% (Figure 2).
Why the Bounce?
Why the bounce in equities while economic data and earnings only seem to be getting worse? Equities are forward looking, pricing off future expected earnings. Once investors believed they had seen the worst of the virus and could estimate the impact, they began to price in better future earnings. As a reminder, current stock prices are an estimate of all future earnings discounted to the present. So, one year of lost earnings is relatively small in the grand scheme, which explains the rebound. However, it is difficult to get the future growth trajectory to earnings right, and this matters a lot in valuing a stock. Right now, the market seems to be pricing in a quick return to normalcy.
Return to the “Good Ol’ Days”
While a sharp rebound off the bottom for earnings seems reasonable, expectations for a full return to the “good ol’ days” seems a bit premature to us. At the most basic level, unemployment will be much higher than the sub-4% levels pre-Covid. Since the US economy is roughly 2/3 consumer driven, lower employment will be highly impactful. Add to that the TRILLIONS of dollars being spent by the government and the associated future tax burden (remember when the US took tax rates down in 2018 and equities all repriced higher? Imagine the inverse in the future). And we do have the upcoming election to add to the uncertainty as well.
Putting this all together, we’re in the camp of cautious participants, balancing the benefit of the upside with the need to preserve capital. The headline indexes seem a bit rich, but they don’t tell the entire story. We really have a bifurcated market with a few large cap names trading at huge premiums, and a large section of the market trading much cheaper.
Our approach is to participate (though not fully invested as we have reservations about just how good things will be post-Covid) and selectively add names as we find value. This allows us to participate in some of the upswing, while enabling us to be comfortable with what we own when the next downturn hits.
On a separate note, during the downturn we found that our approach resonated with many beyond our current client base. If you think Stableford is a good fit for your friends or family, please let us know. As always, contact us with any questions.
Are you interested in making portfolio changes or getting a more in-depth analysis? Contact Stableford today by calling 480.493.2300 or simply request a free trial of our Market Blast.
This market commentary was written and produced by Stableford Capital, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.