The first half of May was like watching paint dry for the S&P 500. Full-on boring. At the mid-month point markets seem to get energized for a bit and pushed the S&P 500 up by just over 4%. Year to date the markets are still negative as May closed out but certainly not down as much from their highs, over -34% like they were in March!
With the 500 companies of the S&P all but done with earnings reporting, companies have shown a drop in earnings of -7.6% for the first quarter of 2020. This really coincides well in our view with earnings having peaked as of the 3rd quarter of 2019. When the 2nd quarter earnings start rolling in during July, we expect a much bigger bite out of earnings to occur but at this point, we will not wager any kind of guess as to how big that bite out of earnings will be.
Despite the rise of stocks in April and May, a large number of negatives still weigh in on and against stock markets. A great deal of the areas which can be and are often measured are not likely stable yet so trying to develop concrete outcomes is much like fortune-telling with homemade Tarot cards.
This chart shows the performance of the S&P index vs the Long-Term U.S Government Bonds for May. Bonds were down -2% in May
This chart below shows the performance of the S&P index vs the Long Term U.S Government Bonds since the S&P index peaked in February. Bonds are up more than 12% since stocks started their down-hill run.
"Despite the fact that casinos make hundreds of millions of dollars a year, I have never met a gambler who claimed to have been a loser." -Ned Davis
Last month we had so many positive comments about that new layout, we will stick with it again this month! Thanks so much for the feedback!!
Be careful to think through what you are reading! One industry reported a 48% jump in customers during May! A great number for sure. There was actually a 48% jump in their number of customers in May from April! Huge jump! The problem is that there was also a -97% drop in customers in May... How? The -97% drop in customers was from May 2019 to May of 2020! The industry? Commercial airline traffic! We are glad it is moving in the right direction but keeping a perspective over where things really are is critical! Cartoon
No 0? When is, -34 + 34 not equal to 0? When you are investing, that is when! In February markets began falling and fell -34% by late March. Since that time, they are now up about +34% but they are still more than 10% below that February number. How does it work that way? If you have $100K and it drops 34%, you then have $66,000. With $66,000, if it grows 34%, you would then have $88,000. You are still short $12K! It's simple math.
10.2% - This is the change in household income for the month of May! Yes, household income went UP last month! This is due to the stimulus checks which went out, the state unemployment checks which went out as well as the Federal unemployment checks which went out and the PPP disbursements which some of this ended up being paychecks for unemployed workers being called back to work!
32.7- This is the percentage of household income that went to savings in May! A huge number. This is the largest percentage of savings in the history of record-keeping. So, Americans got unemployment compensation from the states and the feds and held onto all of it they could! With money being given out in federal stimulus, federal unemployment (runs out at the end of July), and state unemployment, all of this did NOT do what the federal reserve had hoped it would. It did NOT all get spent! So, if there is more stimulus, more than likely it will not be sent by check or by electronic transfer....... It will likely go out in the form of Visa and Mastercard debit cards or have some condition attached to it! The Feds want it to be spent if you want to have access to it! Here is one thing people did not spend money on.
36% are losers - According to our friends over at Ned Davis Research, 36% of the companies in the Russell 2000 Index—the index of smaller American publicly traded companies - these were companies that were unprofitable before the pandemic. But, as might be expected, this hasn’t stopped investors from chasing these unprofitable zombie stocks higher.
$12.7 Trillion lost - From its 2/19/20 stock market high, US stocks lost $12.7 trillion through to the stock market low close on 3/23/20. From its 3/23/20 low point, now US stocks have gained back $8.8 trillion in market capitalization through the close of trading last Friday 5/29/20. Still a $4 trillion gap!
891,000- The number of housing starts last month. This represents a 30% drop from the previous month, the slowest pace of new home construction since February 2015. Permitting activity for newly-built homes fell 20.8% to a seasonally adjusted annual rate of 1.07 million homes. Housing starts fell short of the consensus forecast of economists polled. This resulted in approximately 23% of the home construction labor being laid off.
40+ What do J. Crew, JCPenny, Hertz, Neiman Marcus, Gold's Gym, CMX Cinemas, Dean & Deluca, Pier 1, Tuesday Morning and about 30+ other companies have in common? They have all filed for bankruptcy in the last 90 days.
$8.5 Trillion- Global tourism is an $8.5 trillion industry per year. U.S. airlines are currently operating at 5% with the hope of 10% in June and 20% in July/August - the distance between what IS and what WAS.
All 60 of the SP500 Healthcare companies have reported aggregate year-over-year earnings growth of +9.3%.
All 65 of the SP500’s Financial companies have reported an aggregate year-over-year earnings crash of -35.1%.
40 Million Americans are out of work! Some are being recalled back to work but the overall estimate is that this will be a slow climb out of a deep hole we are currently in.
Changes are coming to how we shop, eat, vacate, travel, buy food, interact with neighbors, use healthcare, where and how we work, buy homes going forward, etc. Some of this was changed which was in motion long before COVID-19 showed up. Some have been accelerating since COVID-19 got here. Many Americans had not been on a multi-person video chat call before and now many Americans are almost bored with it. My 92-year-old mother, (nicknamed years ago as "Dot-Com-Mom") celebrated Mother's Day with her four children on a live multi-person video call. Her first time ever. Let's all be at least somewhat open to change as time marches us forward.
Let's all try to remain watchful.
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
800 -767- 5364
All rights reserved
Mortgages- We said the rates would start declining. And they have!!
"As you can see in the chart above; Mortgage rates are in a steady decline now and we see that they will be dropping slowly and steady. Our outlook is that there will be a quite noticeable drop in rates between now and the end of 2020. Waiting for the latter is probably better. They will move steadily lower as time marches forward toward the end of the year."
Notice in this chart below, refinancing of homes is slowing down a good bit. This is currently largely due to lenders having tougher lending standards than they had previously. This really has nothing to do with COVID 19 but the tightening of standards started well before COVID 19. This is solely the reason we see the number of refis dropping.
Soon the 2 Qtr will close. Then what?
In about 30 days from now, the 2nd Qtr of 2020 will close. Soon after, the earnings of the individual 500 companies will begin to be reported. The estimates do not look pretty from this angle so far.
The earnings from the 1st Qtr have all but finished coming in now and earnings are down -7.68%. Remember that the COVID 19 impact really starting hitting in March, that is when a great deal of the lockdowns began. So COVID 19 only somewhat partially impacted earnings of the 1st Qtr. April had basically every state in the U.S. under heavy restrictions and many states stayed under heavy restrictions well into May/June.
So when the lockdowns occurred, it was basically like falling off a cliff financially for many but not all companies. The impact was swift and almost instant. As the restrictions are being lifted, and this is typically being done in stages so the impact(s) will be slow and somewhat steady which means business activity will slowly build back up in most cases. It will take a while as will the rehiring of more than 40 million workers. The rocketing unemployment rate will fall somewhat quickly at first and then begin to slow in movement as we get down to the 10% unemployment range, slowing further still as we get into single digits. It is a long way home from where we are today.
While on the topic of employment/unemployment let's look at where we are from just 90 days ago. Of all the people who were working just 90 days ago, 1 out of every 7 who were working, either is not working today OR will soon be out of work. This is a complete turnabout from just 90 days ago!
Why will it get worse? A few thoughts. 1) State government budgets are being slashed by 11% - 17% in just the current announcements. The problem is, most of those staffing cuts which need to be made to match those budget cuts have not been announced yet. Those terminations are still to come. 2) Also realize many people have simply been furloughed, not working but on some kind of partial pay today so they are not part of the unemployed. At some point, if the business is not back to 100% (and it won't be for most industries for a very long time), those furloughs will turn into terminations, and terminations will move those employees from partial pay to no pay. When money gets tight, people not only have less to spend they also chose to spend less with what they have. They will save!
When most people sense, feel, or have financial stress, they stop buying. They hesitate or think through purchases for much longer periods of time before they buy, Some keep looking hoping it will go down in price or they can find it cheaper and they buy less than they would have or buy a lesser version than they would likely have purchased before that financial stress set in. It's pretty much human nature.
Is this happening now? Look at this chart below and come to your own conclusions.
The dramatic change in the savings rate by the average American.