Looking Around Corners & the “Tilted-V” – YouTube Video & Transcript

In this video, Terry Gardner, C.J. Lawrence Portfolio Strategist, discusses how the stock market is “looking around corners” and will likely follow a “tilted V” shaped recovery. Terry also takes a look at the sequential recovery in S&P 500 earnings per share and elaborates on why it may actually be different this time.

David Gallacher, CFA – Careful Stock Selection is the Best Treatment in Today’s Market

Video Transcript

Terry Gardner:

Hey, good afternoon, everyone. It’s Terry Gardner from C.J. Lawrence on Tuesday, May 12th. Hope everyone is safe and doing well. I wanted to cover a couple of topics in today’s video. First off, we want to discuss the markets looking around the corner approach. Two, we want to introduce the concept of the tilted V recovery. Third, we want to take a look at the anticipated recovery and S&P 500 earnings. And then finally, we want to highlight what actually maybe different this time in this recovery. As you can see, I’ve got my trusty assistant over my shoulder here, ready to assist.

Terry Gardner:

So, first of all, with regards to looking around the corner, it’s a concept we want to introduce today because we feel the market is taking a little bit of a different approach over the last few days and weeks. When we talk about looking around the corner, if you watch action movies or action TV programs, you oftentimes see a law enforcement unit or a military unit rushing to an objective, stopping, peering around a corner, and when they get the feeling that all is clear, moving to the next objective. And that’s kind of what the market is doing here; it’s rushing forward until it gets the all clear making that next move. So it may pause, move again after it digests some information and continue that pattern. So don’t be surprised if we see the market have these spurts forward and then flatten out for a period of time, even fall back, and then continue in that type of a pattern.

Terry Gardner:

Secondly, we want to introduce the concept of the tilted V recovery. So if you listen to the pundits on TV, they often talk about the economy and the market recovering in some type of a shape. Oftentimes they talk about a V or a U shape or a hockey stick. We’re going to introduce some audio visual effects today for today’s video. The V recovery obviously looks just like the letter V, right? It’s a slope down and a slope back up. And the question is, “Are we in for that type of a bounce back recovery?” Others have suggested were more of the U, which is a long drawn out kind of bottom before the market really recovers. And then for my hockey friends, there’s always the hockey stick recovery, where there’s this long drawn out pattern down. And then we kind of have this very slow, steady ascent.

Terry Gardner:

We actually don’t think any of these apply, certainly may apply in some regard, we think we’re in this kind of tilted V scenario because the market fell quite quickly and may recover more gradually. So the market had this steady and quick precipitous drop down. We think the recovery won’t be a quick immediate snap back, but it may be a more gradual recovery over some period of time. And when we’re looking at the earnings picture and some of the forecast and GDP, that tends to be what we see. So, we’re inclined to follow that approach in terms of where the market heads from here.

Terry Gardner:

And when we look at the slope of the earnings curve, so S&P 500 earnings came in for the first quarter and down about 14%, which wasn’t horrible considering what a full quarter would look like. And that’s what we’re likely going to see in the second quarter is a full quarter decline. So expectations are for the S&P 500 earnings to decline 40% in the second quarter. And that’s according to estimates provided by FactSet. Those are bottoms up numbers, meaning that those are an aggregation of all of the individual company analysts forecast for their S&P 500 constituent companies. A little bit of a different approach versus the top down, which would be a strategist view, a more macro view. We like to look at that bottoms up company by company analysis.

Terry Gardner:

In the second half of the year, we start to see the declines of bait. So down 19% in the third quarter and down only 5.5% in the fourth quarter. And on a sequential basis, which I think is important, because what we’re going to start to see after earnings bottom out in the second quarter is this sequential tick up quarter to quarter in earnings. And I think that’s what the market may be looking out at now to gain a little confidence that, “Hey, we may have to wait a period of time for earnings to really accelerate, but they’re going in the right direction. So it’s probably okay to own stocks here.”

Terry Gardner:

And then fourth, we wanted to talk about the concept of, “It’s different this time.: Whenever you hear someone say, “Oh, no, no, it’s different this time.” That’s when you should be wary, because history repeats. But I think given the circumstances, this is a pretty unique downdraft and market cycle, and there will be some changes, some differences in this recovery and some probably permanent. So we’ve talked a lot about the temporary behavioral changes that have been caused by the coronavirus, but there’ll also be some longterm fundamental changes to businesses and the economy.

Terry Gardner:

Now, we think it will be very investible. And we’ve talked a bit about those, we focus a lot on that at C.J. Lawrence, certainly in the healthcare industry where we’re fairly heavily invested, we’re going to see big changes in telemedicine, diagnostics, testing, use of artificial intelligence in drug and vaccine development and in ailment diagnosis. So healthcare will be a rapidly changing sector industry. One that has gone through significant change, but we think we’ll probably see accelerated change. That’s a place we certainly want to be.

Terry Gardner:

In banking and finance, we’ll see the evolution likely of blockchain technology, cashless transactions and the evolution of other financial technologies to the consumer. In entertainment, industrial, we will probably see an acceleration in the use of virtual reality, whether it’s for entertainment or industrial purposes, as well as digital printing on the industrial side. And then on the military industrial complex, we like the defense contractors in general, but we’re going to see, I think, the evolution or a reinvigorated focus on protecting the population from bio agents and that type of warfare. So we may see a whole new industry crop up around that, where it’s going to be very focused on that. And there may be many, many more, more than we could even mention.

Terry Gardner:

I’ve even heard some people talking recently about the evolution of cloud kitchens. So we’re all taking in delivery from here, there, our favorite restaurants. There are cloud kitchens popping up where they’re just kitchens, they’re not even restaurants and they’ll cook whatever meal you want, and if they don’t have it onsite they outsource to another cloud kitchen so that you can have prepared for you a custom meal when you’re so inclined.

Terry Gardner:

So nonetheless, the point is that there may be many different things to invest in this recovery, as opposed to just looking at past recoveries and which stocks and which groups and which sectors performed well. We really want to get out in front of the innovation that’s taking place that’s being catalyzed by the coronavirus and the changes that are afoot. So thanks for tuning in to our weekly video. If you’ve got any questions, feel free to follow up with me at tgardner@cjlawrence.com or give me a ring at (212) 888-6403. Again, it’s Terry Gardner at C.J. Lawrence, have a great day.

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