The difference between the 2008-2009 and today is the catalyst.
It was clear before the markets broke in 2008, that financial firms were leveraged and made loans to people that should have never been allowed to have a loan. It was a known.
The S&P fell about 45% from October 2008 through March 2009. Lehman Brothers, Bear Stearns and other famous Wall Street firms went out of business and many professionals lost their jobs or had their income severely reduced. It wasn’t fun. The government had to get involved, but it was a fixable problem because it was known.
Back then, the visibility on future earnings was taken down to 8 times forward numbers, an occurrence that had not happened since the fall of 1974. We all knew a solution could be devised.
Today, we have an unknown: Covid-19. Many people in the US are contracting it and do not know it. Testing for the virus has thus far not been done in earnest. Famous large events such as the Master’s, St. Patrick’s Day Parade and others have been cancelled. Schools are closed across 26 states and large cities like San Francisco and New York have become ghost towns as local governments follow the guidance of the CDC in implementing stricter social distancing measures.
It’s the uncertainty around this coronavirus that has exacerbated market volatility. Investors simply don’t know when this outbreak will end. Other unknowns are just adding to the mix of trepidation and confusion:
Putin’s fight with the Prince
The dispute has taken oil prices to a point not seen in recent years. For oil companies to survive, the price needs to be higher or risk job losses for thousands of employees. Resolution of this dispute is a big unknown and we would call on President Trump’s administration to serve as referee between the two and get them to play nicely in the sandbox. The fight will drag on S&P earning if a remedy is not found.
The impact of the virus and other market antagonists on earnings is still very much an unknown. The S&P 500 was trading at 19.5 times earnings, slightly expensive considering the U.S. growth rate before the virus and the oil dispute.
Most estimates peg S&P earnings for 2020 in the range of 160 to 165, down from 175. At Granite Group, we’re looking at 157 for 2020. For 2021, estimates have lowered to 175 from 195. Given where the S&P closed on Monday at 2386, that would make for a price-to-earnings ratio slightly more than 15x earnings 2020 and almost 14x earnings for 2021. The long run P/E are 15x, 15.8 and 16.4 for the 30, 20, and 10-year average respectively, no longer expensive if the earnings hold, but not dirt-cheap like in 2009.
What should investors do?
We understand that people are panicked. Cooler heads will prevail. The markets may go lower but the upside a year from now is appealing. Here are steps to take now:
- Make sure your allocations between stocks and bonds reflects your cash flow and risk tolerance
- In case of a further meltdown, have cash on hand for six months of expenses
- Speak with your investment professional
- Be prepared for a longer U-shaped recovery. It will be a recovery but not a bounce back
At 2,386, we would leg in slowly and if there is any further down, we would be aggressive to allocate according to your plan.
Concerned about your market moves? Granite Group Advisors can answer questions at any time so give us a call today at (203) 210-7814 and speak to one of our investment professionals.
Guys this is excellent… short, to the point, evidence-based. Thank you Norm
?Norm Conley CEO & CIO JAG Capital Management LLC (314)997-1277
I think your comments are spot on. I personally believe the U.S. Govt will have a “heart to heart” conversation with the Saudi’s to eliminate this price war as U.S. shale producers will start going under in large numbers if issue not addressed quickly.