Phew. I was watching every tick for the last 20 minutes of Thursday's trading, and it was really, really ugly. The sound and fury of the move into the close was reminiscent of the action preceding Christmas 2018. The markets are much, much higher than they were then, though (as of last week it would have been "much, much, much"). The numbers show a very clear picture between Christmas Eve 2018 and Thursday's closing.
12/24/2018 -- 2/27/2020 pct. chg.
S&P 500: 2,351 -- 2,979 +26.7
DJIA 21,792 -- 25,766 +18.2
Nasdaq 6,193 -- 8,566 +38.3
Russell 2000 -- 1,267 1,498 +19.1
Does that look like there's no downside left? Not to me.
The fact of the matter is that, as of last week, the DJIA had risen by more than a third and the Nasdaq by almost half in a period in which there has been no discernible growth in the earnings of Corporate America.
According to FactSet, S&P 500 EPS have been as follows:
2020E (consensus) $175.98
2020E (PG, LLC) $160.00
So, my firm's estimate of another lackluster year for corporate earnings is now coming to be recognized by the street, with Goldman Sachs onboard for a zero-growth year as of Thursday morning. The impact of COVID-19 on the global economy is going to be as vast as the spread of the virus itself, which has clearly now reached pandemic status.
The passage of the Tax Cuts and Jobs Act on December 22, 2017, gave U.S. companies a free 14% on the after-tax line (the statutory rate went from 35% to 21%; actual single-company calculations are quite complex) and that combined nicely with the Trump Jump growth spurt already underway in the U.S. economy. Since then it has been bupkes for corporate earnings growth for the S&P 500, and COVID-19 makes the consensus estimates for 2020 look like fantasy figures.
It is going to be extremely difficult for major multinationals to maintain profit levels. One great indicator is the health of the global automotive industry. I have been following that space since I started as a cub analyst at Lehman Brothers in June 1992, and I have never seen such a dire outlook for the global players. Even 2009 didn't feel this bad, at least from a global perspective. But, hey, Tesla's (TSLA) still worth $128 billion even after this week's plunge. The fair value of the company is a mere fraction of that market capitalization, though, especially with coronavirus decimating the Chinese auto market just as Tesla has begun churning out made-in-China Model 3 at its brand new plant in Lingang.
But Tesla is far from the only overvalued stock in this market. In fact, this week's performance is telling you that they all are. Some more than others, of course, but it is absolutely true that equities as an asset class can be re-rated. That is what is happening this week.
So, in yesterday's RM piece, I noted that on March 6, 2009 the S&P 500 had hit a 45-year low at a value of 666. To be clear that was on an inflation-adjusted basis. On a nominal basis, though, the index that day was trading only pennies away from its value on March 6, 1996. So, in the Great Financial Crisis we saw markets crash to a 13-year low, and that is light years beyond this week's move. On Thursday, we broke through a level on the S&P 500 that had first been breached on July 10, 2019. Retracing seven months of gains does not a crash make.
The final bit of history produced from my research this week is a good one. Did you know that in the past 70 years the S&P 500 has NEVER posted two consecutive years of positive single-digit percentage returns? The last time that occurred was in 1947 and 1948. Since then, the roller coaster has been in effect, as the contrasting total returns for the S&P 500 in 2018 (-4.38%) and 2019 (+31.49%) show. It may feel like this bull market has been stampeding forever, but 2015 (+1.38%) and 2011 (+2.11%) only delivered positive returns with the inclusion of dividends; the S&P 500 actually posted slight price declines in both years.
So, as of last week, most of the gains in the stock market had been produced in the prior 12 months. That's why those gains have reversed so quickly this week.
Inserting some measure of market timing into your asset allocation decisions is essential. Everyone's crystal ball is cloudy sometimes, but to just sit back and do nothing in the face of crisis can be a fatal mistake. So, if you were thinking, man, we were a little ahead of ourselves coming out of 2019 but we'll probably just have cool, no worries year in 2020, Mr. Market has proved you wrong.
Have I mentioned that it's an election year? Get your popcorn ready and enjoy the show.