46 Days

By David Nelson, CFA CMT

In the early days of the pandemic equity markets reacted to a combination of data, news driven events and of course human emotion. Plummeting at a pace not seen in recent history it took just 23 trading days for stocks to fall from peak to trough. This historic downturn dwarfs the slow-moving train wrecks of the dot.com bubble and financial crisis taking over 600 and 350 trading days respectively to unfold.

S&P 500 1 Year
Sp retracement

The decline fed by a mindset of terror and lack of reliable information was followed by a rally almost as intense. Here we are exactly 23 trading days from the March 23rd low scratching our heads asking what happened? Did markets deserve to fall as far as they did and even more important are stock levels today justified by current economic conditions?

Today, the S&P 500 sits just above the 50% retracement level leaving investors with more questions than answers. To date price discovery has had little to key off other than the latest news cycle driven by click bait headlines and BREAKING NEWS banners.

As states and local municipalities start to re-open traditional equity analysis will return just as soon as we can attach a number to the E in P/E (price/earnings ratio). We know the numerator but without a denominator the rest of the valuation exercise is little more than a guess.

Russell 2000 1 Year
Rut Retrace

The latest Wall Street debate is whether there is a disconnect between U.S. stocks and the economy. With the S&P 500 only 16% from an all-time high that’s a fair question. A better barometer of economic activity is the Russell 2000 or small cap stocks. Down 43% at the bottom. Small cap retracement is less than 38% and many are significantly more at risk than their big cap brothers and sisters.

The shelter in place vs open the economy debate rages on. Current polls show 8 in 10 Americans support current shelter in place restrictions. Unfortunately, $Trillions in fiscal and monetary stimulus are not a guarantee and difficult to repeat. At best they can act as a bridge loan before it becomes an economic necessity to turn on the lights. A month from now if little progress has been made, I suspect the above poll will yield very different results.

Sixteen states have unveiled plans to re-open with more to follow. The timing isn’t certain but as the conversation shifts from the virus and how to marshal available resources to restarting the economic engine, we can at least make an attempt at making economic and valuation judgements for 2021.

S&P 500 – 2021 Estimate Revisions

It’s early in the year to be pricing in 2021 earnings but investors have little choice with 2019 nearly impossible to judge. CEO’s continue to pull guidance unwilling to guesstimate the next quarter much less the year. Current estimates for 21 come in around $168 down about $30 from the end of January. This is likely an inflated number given many of the estimates are stale. Even if the $168 holds and we put a 20 multiple on it the best we can hope for in 2019 is to reclaim the highs of earlier this year. That’s a big if and dependent on those estimates not slipping further.

The above isn’t a prediction but merely an observation of current data and what it implies. Each day that passes without the bulk of America returning to work not only caps any upside but increases the odds of a March 23rd low re-test.