New rounds of testing have found that the infection rate is 10-50 times higher than the original estimates. That sounds terrible, but it means the denominator for figuring out the death rate was potentially a lot larger than initially suspected when it came to the Coronavirus. Instead of the original death rate, estimates of around 0.8%-3%, scientists are now suggesting the death rate is more like 0.1%-0.15%. In addition to that, investor sentiment is getting more information and it shows us where the vulnerable slices of the population are. Initially, studies showed that people under age 25 are least negatively impacted while the most heavily impacted are the elderly and people with obesity, diabetes, heart disease, and lung problems. It’s terrible than anyone is gravely injured or dead from exposure to the disease, but public health officials and politicians are starting to determine that there is probably a better way to deal with the pandemic than a broad lockdown of every citizen. The reason we share that information with you is that going forward, as we get into this week, we are going to start looking at economic data as well as data on the Coronavirus. There’ll be a major debate going on, which is going to put emotion into the market.
Unknown vs. Known
In the past two weeks, the market has been trending up on things that are unknown. The “unknown” has been that there’s a possible drug or vaccine for the virus and the talk of Americans possibly going back to work, which we hope is sooner rather than later. What we’re seeing in the market is that the market has been ignoring the things that are considered “known”, which have been negative. Last week, retail sales fell 8.7% which is its worst reading on record. Keep in mind that 68% of our economy is made up of consumer spending. In the past three weeks, we’ve seen 22 million Americans file for jobless claims. That puts the unemployment rate close to 20%. We also saw manufacturing fall 6.3%, which is the worst since 1946. We believe the market is going to be tested again this week when the earnings reports come out along with more economic reports. Jobless claims report comes out again on Thursday where we are wondering if we will see another 5 million Americans file for unemployment. We expect housing reports to be weak on this week’s report and Friday, the consumer confidence rating will be released. With all that being said, there’s a lot for the market to digest this week. Will we see good news on the virus and the markets trade up again, or is the market going to look more towards the negative economic reports and go down?
Overall Look at 2020
Looking at 2020 overall, our current research shows that the S&P 500, the largest publicly traded companies in the U.S., has projected total earnings for the year to be around $139. If you multiply that by 18, which is a fair multiple, that gives an estimated value of around 2500. Currently, the market’s trading above 2800. It’s fair to say that $139 is optimistic and suggests that the fourth-quarter earnings will come in strong. Currently, the market is overpriced but we would say that 2500 is a relatively optimistic, fair value. When you see those prices and see the S&P 500 move, we think there is a lot of optimism built-in and is something we’re going to watch closely. The fundamentals of the earnings can impact the price and the value of investors’ portfolios overall. As earnings come in low, they’re going to reprice to what the fair value is. We like to be optimistic but at the same time, we must be realistic. We look at what the data says and where we see earnings going because that determines prices.
We went through $350 billion worth of PPP loans in three short three which exhausted the first round of available funds. However, it proved to be a very intelligent move to use the SBA to execute the loans. Everything flowed through the system very well. About 1.6 million businesses benefited, 4,300 lenders participated, and the average loan amount was a little under $100,000. We deduced that most of that was for businesses to make payroll. The good news this week is that we should get a political compromise on another $370 billion to go back into the system. The hold up on the issue of more funding was because of certain hospitals. If they work through those issues, there should be funding available for a second round coming soon. This is very good news and valuable when it comes to saving jobs in the country.
We’re starting to finally see some cohesiveness between the federal government and states. The federal government has recently proposed a three-phase blueprint for states to re-open businesses. New York is finally starting to feel that they are potentially going over the peak of virus cases which is a huge accomplishment and proves that New York is doing their part staying in and social distancing. The focus for the next two weeks is going to be on testing for antibodies. When testing for antibodies, it shows whether somebody has had the virus and fought it off. This can be important in the future for such things as plasma transplants, vaccines, and other things. Another state we’re seeing be proactive is Texas. They have re-opened parks and have started to perform elective surgeries. Certain places are going to set up curb stop retail sales. With that, we’ll hopefully see the consumer start to be able to get back out and have a positive impact on retail sales. We want to make sure that we bring all this data together. One thing we’ll be watching closely is the rippling effect as the states start to open back up. We all hope that the Coronavirus does not increase in those states as things open again. All of the data is going to be taken into consideration as we move forward in and businesses get back to work.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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