News & Insights
A Message to Our Clients from John M. Silvis, CFA | Chief Investment Officer
As of March 10, 2020
The capital markets continue to assess the risks of the spread of the COVID-19 virus and the recent collapse in oil prices. As we monitor the shifting landscape, it is important to stay focused on the long term. We expect heightened volatility in the weeks to come as we see the economic fallout of the epidemic.
The economy has been in good shape, but a recession cannot be ruled out. The U.S. economy added 273,000 jobs in the month of February and the unemployment rate fell to a 50-year low of -3.5%. However, the likelihood of a recession is rising, with Strategas Research Partners increasing the odds to 45%. EvercoreISI, one of the best forecasting firms on Wall Street, recently lowered second quarter GDP growth to -2%, however it sees the second half of the year rebounding with growth in the fourth quarter closer to 3%. They also see 2021 now rising to 3% GDP growth. Any recession is likely to be shallow and followed by a strong bounce back.
More stimulus coming in the next few weeks. The Fed announced an interest rate cut of 50 bps on March 3rd, but it’s increasingly likely they will cut rates again in the coming days or during their meeting next week. Fiscal stimulus is also a rising possibility as President Trump is advocating a payroll tax cut and an aid package for those affected by the economic fallout. Japan recently unveiled a $4 billion aid package to help its economy, following other Asian countries. The fiscal and monetary stimulus will help stabilize markets in the coming months.
Valuations are now trading below their long-term average, focus is on earnings. After peaking close to a Price to Earnings ratio (P/E) of 20x future earnings, valuations are much more attractive and setting up for a good entry point in the weeks or months ahead. The S&P 500 is currently trading at 15.4x future earnings, but there is a lack of clarity on those earnings as companies reduce guidance until the effects of the global slowdown are measurable. On a brighter note, China seems to be coming back online and supply disruptions should start to diminish in the next few months.
Corrections lead to buying opportunities. The S&P 500 Index from the peak in February to the low yesterday has corrected over -19%. While it’s hard to focus on the long term in moments like these, history indicates that after a correction tends to be great long-term buying opportunities. Since 1980, there have been 31 instances of the S&P falling more than 10%, with the most recent in the fourth quarter of 2018. According to LPL Research, over 90% of these instances have provided a median return of 25.3% twelve months after the low.
Looking out of over the next few years, stocks are more attractive than bonds. With the historic decline in yields (the 10-year Treasury is currently yielding 0.63%), we expect equities to perform better than bonds in the foreseeable future. As of yesterday, 95% of the stocks that pay a dividend in the S&P had a yield higher than the U.S 10-year Treasury. For example, Apple (AAPL) has a current dividend yield of 1.16%, more than double what the 10-year Treasury yield was a few days ago and, unlike bonds, has upside through potential price appreciation and dividend increases.
As we enter a period of market uncertainty, it’s important to focus on the long term and the benefits of asset allocation. The longer you are in the markets, the higher probabilities you have of positive equity returns. As always, please feel free to contact a member of the Fairport team with questions, comments or concerns.
Fairport is registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.
This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.
All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and Hightower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.
This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of Hightower Advisors, LLC, or any of its affiliates.