“V” Stands for… – April 2020 Commentary

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The March stock market decline that few saw coming was followed by a stock market recovery in April that few were expecting. With the S&P down 20% for the year as of March 31st the 12.7% recovery in April leaves the index down 9.85% for the year. For portfolios invested 60% in equities and 40% in bonds and cash the returns were approximately -19% in the 1st quarter, +8% in April and -12.5% for the year.

Both market commentators and investors were left scratching their heads trying to marry the juxtaposition of the darkness of the pandemic news to the light of the market having experienced its largest one month return since 1987. News stories describing job losses in the tens of millions on the same page with those of Dow Jones Industrial’s Average gains in the thousands of points seemed, well, strange.

Included in my commentary of March 30th was the observation “the economy will rebound and will experience limited lasting negative effects.” I also predicted that “by mid-April the shuttering of our economy will be reversed”. That has proven to be too optimistic by about two weeks but as this is written the economy is starting to reopen in many states and I believe that by mid-May in much of this country we’ll be on the way back to business as usual. This is an opinion many do not share as the quotes at the beginning of this commentary attest but in July, I suspect the financial press will be filled with stories with headlines including the words “surprising”, “growth”, “increases” and “recovery”.    

Don’t Bank on a V Shaped Recovery”; Morningstar, May 1st 

In attempting to understand the behavior of the stock market it is easy to be drawn into focusing upon the influence of the many effects upon that behavior but there is one cause that, much more than any other, is the source of equity market returns, economic growth rates, which create the opportunity for increases in corporate profits. In late February, due to the global pandemic, it became apparent that, for the first time since the Global Financial Crisis, earnings in the current year were likely to fall below those of the prior year. During the first three weeks of March it was the market’s inability to identify the extent of the economic damage created by the pandemic and our nation’s public policy response to it that led to the market’s precipitous declines.

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Two events have significantly impacted the performance of the market these past ten weeks. First, was the market’s increased confidence in its ability to “see through” to the extent of the economic damage likely to be experienced. The source of the market’s ability to put in place its lows was not that the news was in any fashion “good” but rather that its outlines, even if only vaguely, could be foreseen. Second, the market’s recovery this past five weeks (the market actually made a low as measured by the S&P of 2191.86 on March 23rd), I would suggest, is based upon its estimating that the length of time for the negative consequences of the pandemic to “wash through” our economy will take approximately three months. Lest we forget, the market looks three to six months into the future and what it is “seeing” is what is currently affecting the market. 


 “The Fed Doesn’t Believe in a V Shaped Recovery and Neither Should You”; SeekingAlpha.com, May 2nd

Here the logic being employed may appear to be somewhat circular as I’m seemingly suggesting that the best reason to be optimistic about the economy is the market and the reason to be optimistic about the market is the economy but in this instance the pieces actually fit together very nicely. The market bottomed in late March. In six months, we’ll be entering into the 4th quarter. Earnings in the 2nd and 3rd quarter will not be pretty and the market knows this. Heading into this year earnings for the S&P 500 were expected to approximate $176 versus 2019’s $163. Factoring in the effects of the pandemic this year’s earnings might be $138. With the prospects for a “V’ shaped recovery starting late in this year’s 3rd quarter, and with the momentum for accelerating economic growth rates carrying through into 2021, a reasonable estimate for 2021’s earnings is $180; modestly above the original estimate for 2020. 

The Week Business Waved Goodbye to the V Shaped Recovery”; Financial Times, May 1st

With a strong economic recovery in store for this year’s 4th quarter, and with the recovery gaining momentum throughout 2021,  I would offer 3600 as a reasonable one year target for the S&P 500, a 24% increase above the April 30 market close and 6% above the all-time market close on February 19th

What does the “V” stand for? The vacation, and the relatively short one, for the decline in the current value of investor’s portfolio values versus those at year end 2019. And a smile. MUCH better day’s will soon be ours to experience and celebrate.

Mark H. Tekamp

May 6, 2020