- April 4, 2020
- Blog , The Portfolio Strategist - Terry Gardner
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The S&P 500 Will Recover Faster Than the Economy – YouTube Video & Transcript
In this video, Terry Gardner of C.J. Lawrence revisits the phases of the Corona Virus impact on the equity markets, reviews recession math and valuation range, and shares proprietary analysis of the S&P 500’s sub-groups and explains why the Index will recover faster than the broader economy.
Hi, good afternoon everyone. It’s Terry Gardner from C.J. Lawrence on Friday, April 3rd. Hope you and your families are safe and healthy. I wanted to send out a short video this week to cover three topics. First being, we want to highlight the three phases of the market’s reconciliation with the Coronavirus. Two, we want to revisit our recession math with regard to the S&P price range that we set a couple of weeks ago. Then thirdly, we want to share some analysis with you that we conducted this week that looks at the S&P 500 sub-industry groups and gauges how quickly they can recover from the Coronavirus. The ultimate conclusion is that we believe the data supports the argument that the S&P 500 will recover much faster than the broader economy will.
So first off, with regard to the phases of the virus and where we are. As we mentioned in last week’s video, we believe we’re past peak panic. The second phase being where are we with regard to peak virus? Here in New York, we’re expecting another two, perhaps three weeks, before we reach that point, and then we’ve got to see how the virus and peaking of the virus spreads across the country. Third, we talked about peak bad news. We’re just entering that phase this week. We saw this morning that payroll data for March was much worse than we had expected, and the unemployment rate rose to 4.4 from 3.5% last month. We would not be surprised to see unemployment rise to 10 or even perhaps 15% by the time this is all over.
Our hope is that it’s transient and that will be important to see how the markets react. But we’ve got a ways to go with regard to the economic data, and we will start to see, starting next week, as corporate earnings start to flow, we’ll see earnings estimates come down for S&P 500 and other companies. As well as guidance from managements of these companies which will likely be quite bleak. So we’ve got to get through this bad news and see how the market digests this bad news as we progress through the bottoming process. So buckle your seatbelt because we’re in for a raft of bad news to come.
Secondly, with regard to our recession math, nothing much has changed there. We kept talking about a bottom of 2200 and a top of 2700, we’re sticking with that range from a fundamental basis. It’s tough to fall back on fundamentals when we’re unclear as to where GDP is going to be and where S&P 500 earnings are going to be. We’ve tried to take a conservative approach, use recession type scenarios, and use earnings forecast for 2021 that are even below where they were in 2019. So we still hold to that range, it’s clear that the market can move above or below that range very easily. The VIX, the volatility index is still very high. So we would expect that volatility and wide swings should continue to be expected for the foreseeable future.
Then third, we want to share some analysis that we did this week, looking at the S&P 500’s sub-groups. As you may know, the S&P 500 is broken down into 11 major sectors, but then those sectors are broken down further into about 128 sub-groups. So we went group by group, and categorized each of them with regard to their level of disruption from the Coronavirus. We grouped them in three categories. The first being what we call the impacted and the definition to us was, groups that will face two or three quarters of disruption or being impacted by virus-related shutdowns. The second group we labeled as disrupted and those were the groups that we thought would face three to six quarters of below par or below expectation results as they recover more slowly. Then the third group being groups that would likely be impaired and would face significant restructuring in the months ahead.
So as examples, in the first group, impacted group, we included groups like application software and consumer electronics, which we think will rebound relatively quickly as things start to go back to normal. In the disrupting category, category number two, we included groups like railroads and regional banks, which will have some struggles for a longer period of time as supply chains, and as debt levels, come back into more normal ranges. Then third group, the impaired group, being groups like airlines and hotels, which will likely undergo considerable restructuring in the months ahead.
So here are the results. So interestingly, 78% of the S&P 500 groups, sub-groups fell into the impacted category, that was fairly bullish from our perspective. 11% fell into the disrupted category, and 11% fell into the worst, the impaired category. Of course, this is an unscientific study. I did this based on qualitative and quantitative measures. But I think it helps bolster the case that the S&P 500 will recover much faster than the broader economy, given that 78% of the sub-groups under the index fall into that top category. Happy to discuss that analysis with anybody who’s interested. Also, for those who are interested, I will be on Yahoo Finance’s First Trade program on Monday morning, kicks off at about 9:15. For those of you with Fios, it’s channel 604. Otherwise, you could stream it on Yahoo Finance and see it live. Otherwise, keep an eye out for our next video, which we will probably produce late next week. In the meantime, be safe and healthy. Feel free to reach out with any questions or comments. Numbers (212) 888-6403 and email is TGardner@cjlawrence.com. Thank you.