Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The 30% market selloff since the S&P 500 hit a peak exactly one month ago on February 19th has been historic (to say the least). With the global economy screeching to a halt, and the number of new coronavirus cases increasing every day, global equities are understandably on the defensive. The economic toll has worsened dramatically over the past week, leading us to lower our S&P 500 base case earnings estimate to $155. This reflects -5% earnings growth for the full year on a -0.5% contraction in GDP for 2020, with the assumption that the number of new coronavirus cases plateaus around Memorial Day- leaving enough time for the economy to directionally show signs of improvement into the Fall and back half of the year. Admittedly, it is nearly impossible to have a great deal of confidence in economic and fundamental assumptions at this point with the duration of the coronavirus pandemic so uncertain. From a valuation standpoint, the S&P 500 now trades at ~15x P/E (long term average is 16.5x). It is important to remember that the stock market is a forward-looking mechanism- meaning valuation multiples will start to rise far before economic data and corporate profits find a trough. Stocks have historically bottomed 4 months prior to recession end and 4-6 months before earnings trough. For example, the credit crisis P/E bottomed at 10x, and expanded to 17x by the time earnings troughed. For this reason, we maintain a 19.5x P/E year-end base case assumption as the market eventually discounts the eventual recovery (results in a S&P 500 base case target of ~3000). In a bear case scenario of -3% GDP for the full year (credit crisis saw -2.5% GDP contraction for full year), we could see S&P 500 earnings hit by -20% y/y, taking full year earnings to $130.
So while we believe this will prove to be a good buying opportunity for the long term, what gets us out of decline in the short term? The Fed is doing a good job, helping credit markets- though we are still watching for corporate credit spreads to find a peak. Fiscal programs are needed, and will be coming (likely over $1T) as the economic impact of the coronavirus pandemic will be big. Most importantly though is the spread of the virus. The spread and economic impact go hand-in-hand. Raymond James Health Care Policy analyst Chris Meekins puts out 4 scenarios with Scenario 1 and 2 having the highest odds (Link HERE). The “Stop Everything” scenario 1 could see a peak in new cases by approximately late April, if we can implement this soon. In this scenario, equities may be near the low now. The “Eventually We Get It” Scenario 2 is if the country takes longer to implement Scenario 1, with a potential peak in new cases by Memorial Day. In this scenario, 2100-2400 on the S&P 500 looks like potential support (with a bias toward 2100). If we follow one of these, the economy can start to directionally show signs of recovery by the Fall and into back half of the year. In sum, we view this as a buying opportunity for long term investors, but would use partial positions (patiently accumulate) with the number of new cases still accelerating in the short term.
IMPORTANT INVESTOR DISCLOSURES
This material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Links to third-party websites are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate, or commercially exploit the information contained in this report, in printed, electronic, or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret, or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec. 501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.
MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.
MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
For clients in the United Kingdom:
For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended)or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Investment Services, Ltd.: This document is for the use of professional investment advisers and managers and is not intended for use by clients.
For clients in France:
This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in “Code Monetaire et Financier” and Reglement General de l’Autorite des marches Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorite de Controle Prudentiel et de Resolution and the Autorite des Marches Financiers.
For institutional clients in the European Economic rea (EE ) outside of the United Kingdom:
This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.
For Canadian clients:
This document is not prepared subject to Canadian disclosure requirements, unless a Canadian has contributed to the content of the document. In the case where there is Canadian contribution, the document meets all applicable IIROC disclosure requirements.
Broker Dealer Disclosures
Securities are: NOT Deposits • NOT Insured by FDIC or any other government agency • NOT GUARANTEED by the bank • Subject to risk and may lose value
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James® is a registered trademark of Raymond James Financial, Inc.
Economy & Policy May 30, 2023 With a debt ceiling agreement reached in principle, CIO Larry Adam looks...
Markets & Investing May 30, 2023 Nick Goetze discusses fixed income market conditions and offers insight...
Economy & Policy May 26, 2023 Chief Economist Eugenio J. Alemán discusses current economic...