MARCH 28, 2020
STOCKS – NONE
MACRO – SPY
Reading The Markets Premium Content – $35/month or $300/year
- Not The Greatest Setup Into End Of Day – Midday 3.27.20
- It May Be A Rough Day – Morning Commentary
- THE VIX SAYS THIS RALLY WON’T LAST
Earnings estimates continue to collapse and are becoming more uncertain. My models are currently suggesting a base case earnings estimates for 2020 of $155.87, which is now about 1% below last year’s earnings of roughly $157. However, as I continue to model, my one standard deviation range continues to decline even further, with a worst-case scenario model forecasting earnings of $139.61 in 2020, which is a decline of about 11% from last year’s earnings. I expect that these forecasts will only continue to decline as sell-side analysts continue to lower earnings estimates for companies in the S&P 500.
The current estimates have a lot of uncertainty priced in as well, as the spread between the lower and upper standard deviation has widen to greater than $30 per share.
Additionally, estimates for 2021 have dropped to $179.41 on a base case, and to $162.46 using a lower standard deviation band.
As a result, the PE ratio for 2021 has now risen to around 15.6, based on the worst-case out the outlook for 2021, which puts the index at the lower end of a fairly valued historical pe ratio based on the 20 quarter moving average.
In essence, with expectations for earnings to continue to fall, it likely means that the S&P 500 will fall further. The rally this past week more than likely was a down cat bounce, and I expected to continue its decline this week.
Again using a historical low-end PE ratio of 16 and a 30% decline in earnings for 2020 and a 20% rebound in 2021, then the S&P 500 is likely worth about 2,130.
The more I live during this period of chaos, the more pessimistic I am growing on a potential V-shaped, or even U shaped recovery. I am becoming more and more certain that parts of the country will remain under a long-term lockdown. With coronavirus case in NY now at over 52,000 and another 21 days until the peak, places like NY could be in this period of isolation and quarantine, not for weeks but months. Living in Nassau County, which now has about 5,000 cases, I see the impacts first hand. They are severe and unimaginable. Roads that once took 10 minutes to drive one-quarter of a mile are now empty. Food delivery services are booked for as much as two weeks in advance; necessary supplies are limited. It has led me to believe that even once the virus begins to recede, people will be slow to return normal activities or to go out to eat.
I continue to believe this is a period that requires caution when investing and picking your spots to invest, and no worthy of chasing higher.
Have a great Saturday
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