As I sit here 8,800 miles away from NYC, I am at a loss to describe the public policy actions being taken in the U.S., especially by some local governments. The markets, on the other hand, make perfect sense to me. This is a classic sell-off, when greed morphs into fear. If you are not experienced enough to have lived through one of these, I am sorry for you and your portfolio, but this is exactly how a mass sell-off is supposed to occur.
I haven't seen anything in the past three weeks that I haven't seen before. So, I can't call it panic.
It is just a very short, sharp shock that has led portfolio managers to liquidate equities and hoard cash. It happens. The fact that it hadn't happened in 11 years only serves to intensify the fear of those who are new to the game.
The bedrock of the now defunct record bull market was the U.S consumer. Now the outbreak of Covid-19 and government intervention are conspiring to instill fear into that consumer's heart. So, that's just a crushing blow for the consumer-facing companies that have come to dominate this market: MAFANG. Microsoft (MSFT) , Apple (AAPL) , Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) , and Google (Alphabet) (GOOGL) .
That was the problem. Overreliance on the U.S. consumer, especially when three of those names are not even allowed to purvey their product to the world's largest consumer -- China. This market had blinders on.
Every word in that last sentence used the past tense. What about the present? The key component in any type of investing, and the one that most investors ignore, is the time value of money. That's where one can easily measure the impact of a sell-off.
The March 6, 2009, low for the S&P 500 of 666, was almost to the penny the same closing value on March 5, 1996. Thirteen years were flushed.
If we just look at the Nasdaq, it hit a low intraday level of 1,185.69 on Sept. 23, 2002, which was the lowest level since the Tech Bubble imploded, Sept. 12, 1996. So, that was a six-year flush.
Looking at the S&P 500 today, the closing level of 2,361 retraced a level first broached in February 2017, when the Trump Jump was in full effect. We are still a few points above the December 2018 low of 2,351, but the real measure of the flush is the full retracement, so the current sell-off has brought us back three years and one month.
So, from a historical perspective, this sell-off is neither unprecedented nor unwarranted.
Really, what we are seeing is the fluff coming out of this market. S&P 500 earnings haven't grown since the Tax Cuts and Jobs Act-driven bounce in 2017. Thus the move to record highs in mid-February 2020 was entirely due to multiple expansion. But that multiple is only relevant when the "E" can be calculated. My below-consensus estimate of another flat year for S&P 500 earnings per share in 2020 now seems like an optimist's pipe dream. U.S. corporate earnings are going to fall this year. By a large margin.
So, that's what is happening. The market is trying to figure out what the "E" will be in 2020 and then put a price-to-earnings multiple on it.
We are a little more than 1% below the fair value estimate I had published in many Real Money columns (15-times $160 of EPS) for the S&P 500 of 2,400. Is that enough to get me to pull the trigger and buy stocks? Not yet. Not when the entirety of Silicon Valley is now being forced to shelter in place.
I suppose the majority of Applers and Googlers can work from home instead of heading to Cupertino and Mountain View, since there is manufacturing at either location. But who will build Teslas (TSLA) now that Alameda County, home of the company's main manufacturing plant in Fremont, is under shelter in place order? I have no idea, and I am still long Tesla puts.
I just can't model this reaction to Covid-19. No rational human being can. Until that changes I can't call a bottom for this market.
Be as careful with your portfolio as you are with your personal health. Risk-off!