Then and Now
Reality is hitting this week as we start the second-quarter earnings season. We expect to see some ugly numbers for the second quarter because it was the first all COVID quarter. It will probably the worst quarter we’ve seen in the last 10 years. When the financial crisis occurred, it was in the fourth quarter of 2008. That quarter was a lot worse on earnings than COVID has been. Last week we reported on the vlog that, on average, we’ll most likely have a drop in earnings in the S&P of about 45%. It was 69% in the fourth quarter of 2008. The fundamental point is that we have had it worse than this before. Another thing about our current situation is that we implemented a stimulus plan much faster than we did in 2008. We had what we learned before along with businesses being a lot more efficient in their modeling, to come out of the backside of this much faster. It seems bad now, but looking at history, maybe it’s not the worst that we’ve been through.
Earning Season Reports
We’ve already seen a third of companies pull their guidance for this year. We’ve talked about that before. What’s most important this week surrounding earning season? We know the second quarter is going to be ugly but what will companies say about the future? What will they say about the current quarter that we are in and the rest of the year? This is going to be the most important conversation in deciding what the market does. Some companies will have to show a path forward to justify their current stock prices. It is going to be a very interesting second-quarter earnings season and a lot to decipher through.
While so much of the media is focused on earnings, there is something behind the scenes that is taking place with dividends. Earnings become dividends that get paid to investors. In the second quarter of this year, we saw dividends get cut by publicly-traded companies in the US by $42.5 billion. That is money that typically goes from corporate America to the individual investor. That investor uses that money either to reinvest in the market or if they are older, they typically live on those funds. With interest rates being so low and the ten-year treasury hovering around 60 basis points, dividend investments have become more and more important on individual investor’s financial future and financial plan of producing that income that they definitely need to live on. If you’re a younger investor and you’re reinvesting dividends, that money comes from the company, and then you as an investor get to buy back into either that company or invest in something else. This creates the demand for investment products which pushes prices higher. So, if you’re looking back at the second quarter, the largest drop since 2009, you should be asking what are companies going to do going forward? That’s where there’s a lot of murkiness that we’ll see as companies report earnings. We know what they did in the second quarter but we don’t know what they’re going to do going forward. The financials of large dividend payers are going to be reported soon which will be very important. How a company is priced in the future value of cash flows is what gives the current value and if you’re a company that is not paying a dividend, it’s very hard to put the fact to that end.
Saudi Arabia, in conjunction with OPEC, is looking to increase production on oil. This could cause disruption in the energy sector and impact oil prices and production. It could also affect US companies and their ability to pay out the previously talked about dividends. CD rates are low, bond yields are low, and now we’re looking at dividends being cut, which is another way in which investors receive income. In this economy, we need to be paying attention to all those things. This is a large reason as to why we emphasize here at Fi Plan Partners, that everyone needs a Financial Blueprint so that you can understand your income streams and understand if you are you on track to reach those dreams goals during worst-case scenarios, as well as in good times. As we navigate through this, we want to keep you updated and to help you understand that the Financial Blueprint and Your Financial House® needs to be in line with your portfolio.
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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