Eleven Eleven

Eleven Eleven.  Stocks rallied yesterday as stimulus optimism spread virally.  As Coronavirus cases rise in the US so has unemployment, with a record 3.2 million workers filing for unemployment benefits in the past week alone.

 

N O T E W O R T H Y

 

Caveat emptor.  Consider this: stocks were in a bull market for 11 years before entering a bear market… which lasted just 11 days.  That is both the longest and shortest on record, respectively.  The bull market which starts today came into being in just 3 sessions… almost a record.  In fact it is tied with an existing record, one which was made back in October, 1931.  Here is another record to consider: 3.283 million people filed for unemployment last week alone.  If you are trying to find a correlation between these records and coming up short, you are not alone.  I will save you some stress – there is absolutely no relationship.  Sure stocks have been severely beaten down in the past few weeks, and many stocks appear to be cheap by recent accounts.  Additionally, the $2.2 trillion economic stimulus package which is expected to get its final Congressional approval today will help to soften the economic blow to the country. These are just a few positive things in a sea of many emerging challenges.  For one thing, though I might be stating the obvious, we don’t even know what the economic impact of this national economic pause will be, how long it might last, or what will emerge on the other side when things do get better.  That is just the high level assessment.  What of the impacts on individual companies? We have absolutely no real insight into what is going on with company financials.  Companies are still reporting earnings from Q4 of last year, you know… last Thanksgiving and Christmas time. Companies usually give forward guidance to help investors gauge performance over the coming quarters.  Since the Coronavirus outbreak in the US began to take hold, virtually all companies are withdrawing their guidance… not lowering… withdrawing.  That means that the companies, themselves, are unsure about what the impacts a paused economy will have on their future earnings.  Remember that there are two primary ways to value a company.  The simple way is to use multiples, like P/E, or price to earnings ratio.  Well, we know the P is down, but the E is very blurry, so we can count that method out. The second primary method for valuation is Discounted Cash Flow (DCF) modeling.  This is a much more rigorous undertaking in which an analyst models future earnings down to actual cash flows.  They attempt to forecast earnings as far out as possible and then they make a big assumption on how well the company will do beyond… like forever (known as the terminal value).  Under normal conditions these two methods combined with several others and some technical analysis would give you the best chance of being successful in picking stocks.  But as we can see, even companies themselves are unsure of their earnings over the next several quarters.  What we do know is that many companies are cash strapped already as they rush out to borrow money from banks and line up for government assistance in order to keep the lights on. Companies are stopping stock buybacks, cutting dividends, furloughing employees, delaying payments, and postponing investments, all in an attempt to preserve cash.  So while it may be difficult to say what a company’s P/E should be or what its intrinsic value price might be, we do know that there will be pressure on those in the coming months. Buying stocks that were badly sold off that may receive restrictive government aid is highly speculative.  Remember, we want to avoid buying stocks that are cheap for a good reason. While it is true that many good stocks fell with the broader markets over the past few weeks and that healthy companies will return to delivering value once this crisis is resolved, it is just too early to tell which ones are cheap for the wrong reason.

 

Money managers have been aggressively rebalancing their portfolios over the past few days. As stocks retreated from recent highs to the lows achieved just a few days ago, portfolios were under-allocated in equities and overweight in fixed income.  Asset managers rebalance the allocation drift through selling bonds and buying stocks in order to achieve the correct balance. That rebalancing has helped stocks move up over the past few sessions, then you add a little stimulus package to the mix, speculators have been rushing in to buy the most brutalized stocks to try to catch the bottom.  For now, it is just too early to tell if these past few positive sessions have marked the beginning of a turn-around for markets.  It is certainly encouraging.   As more and more current economic numbers start to reflect the post-outbreak economy, companies settle in and are able to get a handle of their post-outbreak earnings, and we have enough statistics on the outbreak to understand the length and magnitude of the pandemic, a clearer picture will emerge on which companies will lead the pack on the way back up and beyond.

 

THE MARKETS

 

Stocks rallied with gusto in yesterday’s session as investors clamored to buy what appeared to be cheap stocks.  The S&P500 rose by +6.24, the Dow Jones Industrial average surged by +6.38%, the Russell 2000 traded up by +6.30, and the NASDAQ Composite Index climbed by +5.67%.  Bonds rose again as the spread narrowed and 10-year treasury yields fell by -2 basis points to 0.84%.  Crude oil and the Dollar fell and gold rose, despite the rally in equities.

 

NXT UP

 

– Personal Income is expected to have risen by +0.2% in February, down from January’s +0.6% rise.

– Personal Spending is estimated to have increased by +0.2% in February, even with the prior month’s growth.

– The PCE Deflator, a measure of inflation, is expected to be +1.7% year over year, unchanged from last month.

– March University of Michigan Sentiment may have fallen to 90.0 from 95.9.

– Next week is packed with economic numbers which will start to reflect a more current picture of the post-breakout economy.  Check back on Monday for calendars and details.

 

daily chartbook 2020-03-27

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Muriel Siebert & Co., LLC is an affiliated broker/dealer of the public holding company, Siebert Financial Corporation, which also owns Siebert AdvisorNXT, LLC. Siebert AdvisorNXT, LLC is a registered investments advisor (RIA) with the SEC and with state securities regulators. We may only transact business or render personal investment advice in states where we are registered, filed notice or otherwise excluded or exempted from registration requirements. Investment Advisor products are NOT insured by the FDIC, SIPC any federal government agency or Siebert’s parent company or affiliates.

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