It has been almost two months since coronavirus fears sent the stock market into bear territory.¹ While we are finally beginning to receive tangible evidence regarding the pandemic’s impact on companies’ profitability, there are still many unknown effects we will be learning about in the months ahead.

Here are several of our latest economic and market observations:

• ● Earnings weakness: About three quarters of U.S. companies have reported first-quarter earnings, giving us some initial clues about the economic effects of the coronavirus. Earnings are coming in much lower than expected and about 30 to 40% lower than 2019’s first-quarter earnings.² Estimates for the remaining quarters in 2020 are dropping by the day. S&P 500 reported earnings-per-share, which was about $140 last year, is now estimated to be $107 for the full year.² We may not experience more normalized earnings until the fourth quarter of 2020 at the earliest.
• Fixed-income market recovery: In late March, the pandemic incited fixed-income market volatility³ not experienced since the 2008 global financial crisis.⁴ The U.S. Federal Reserve acted quickly and provided liquidity and lending facilities to the market. Week by week, the fixed-income market has further stabilized, and bonds have behaved more like how you would expect in a recessionary environment.⁵
• Horizontal price movement in equity markets: Despite earnings weakness, the stock market has not been trending significantly upward or downward recently.² While markets will continue to incorporate economic news into prices, they currently seem to be pricing in a relatively short-lived economic downturn.
• Lack of guidance: While the stock market seems to be anticipating a relatively quick restart to the economy, one of the biggest risks to the market is that companies, households and investors continue to defer spending decisions until there is more clarity on timelines and rules. Beyond the initial objective of “flattening the curve,” there has been little guidance from the government on what next goals are. Without next steps and a timeline, most consumers and companies will continue to defer decisions and, when possible, hoard cash⁶, which will likely push back the recovery.

We’re continuing to keep a close eye on the current market environment. If you have any questions or concerns about your investment allocations, please contact your Exencial advisor and we would be glad to assist you.

Sources:

1. CNBC.com (3/11/20) – Dow closes in a bear market for the first time since 2009—here’s what that means
2. S&P Dow Jones Indices (data as of 5/8/20) – S&P 500®
3. Morningstar (4/7/20) – First-quarter sell-off soon roils calm fixed-income market
4. Investopedia (4/21/20) – The Great Recession
5. The Associated Press (3/20/20) – Fed ramps up lending, bond buying to calm financial markets
6. CNN Business (4/30/20) – Americans are hoarding cash: Savings rate hits its highest level since 1981

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

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