Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Volatility is heightened with an average daily move on the S&P 500 of 2.8% over the past 10 days, as investors assess the path of the coronavirus. In the near term, the virus breakout in the rest of the world is far from peaking. Therefore, the daily news flow will remain volatile, and challenging equity markets are still a high probability in the coming weeks or months. Monitoring China is important in the near term, and company commentary does suggest factories are restarting. If a boomerang virus breakout (resurgence of cases in China) does not develop and the supply chain restarts, we would be more aggressive with purchases. However, if factories are shut down again due to a boomerang breakout, expect stocks to decline.
Forecasting the economic growth and earnings impact with a high degree of confidence is virtually impossible at this point, given the unknowns. Nonetheless, we lowered our 2020 S&P 500 earnings estimate to $167 (from $174). This 4% annual reduction is weighted to the first half of the year, with the potential for the economy to begin a recovery in the back-half of the year as the coronavirus concerns eventually subside. We maintain our base case P/E of 19.5x, as the market eventually begins to discount the eventual recovery. This takes our 2020 S&P 500 target to 3256. In this forecast, we are operating under the assumption that the virus impact will prove transitory. That said, we are guarded regarding how bad it gets (for the economy and stocks) before eventually subsiding.
Although many are proclaiming the virus could eventually create another 2008-2009 economic catastrophe, we fail to join the doomsday crowd. During that period, financial institution failures and lack of global funding were potentially worse and potentially longer-lasting negative impacts on the global economy than a virus that will eventually run its course. Economies are going to weaken, and some may even contract due to the virus. However, a snapback is highly likely as the virus scare passes. Additionally, central banks around the world are likely to do their part in supporting the economic outlook. The US Fed surprised investors with an inter-meeting 50bps cut this week. Other central banks, such as China, Australia, Hong Kong, and Canada, have also joined in the monetary stimulus (and there are likely more to come). The central banks’ actions may do little for now due to their inability to directly address the supply chain issues; but when economies restart, the steps will provide an economic boost which will help corporate earnings. We are reluctant to disregard the adage, “Don’t Fight the Fed.”
In sum: Instead of trying to pick the final low, we suggest long-term investors patiently accumulate during weakness in the period ahead. Regardless of where equities print the final low, we are comfortable expecting an equity market higher than today over the next 12-24 months.
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