#474 Trying to Reason with Hurricane Season

Hurricane Market Impact

This time of year we usually get questions regarding the impact that hurricanes have on the market. Looking back at the 15 most devastating U.S. hurricanes in history, there wasn’t a lot of impact on the markets surrounding them. The S&P 500 averaged almost 0.5% up three months after major hurricanes. The overall market was up 2.6% on average three months after and up a 5.5% average, six months after a major hurricane. Even though there hasn’t been a lot of impact on the markets, there has been an impact on the Energy sector. The area ranging from the Texas coast to the Mississippi coast accounts for about 45% of total U.S. refining. We are starting to already see a 58% production cut because of the storms in the gulf this week. So, hurricanes do matter because higher energy prices mean lower money in consumers’ pockets to spend.

Earnings Season

The S&P 500 earning season has pretty much ended. We had some major earnings reports last week to cap off what was a dark 2020 second-quarter earnings season. We saw second-quarter earnings drop 34.6%, which was actually better than the 46% expected drop in earnings. With that large of a drop, you would expect the market to take a hit on the chin, but it was actually positive news because it wasn’t as bad as projected. Now that earnings season is behind us, we are getting into hurricane and political season. Looking forward, the market is definitely going to be focused on future earnings. A lot of market participants view 2020 as kind of a lost year. The next 12 months is what’s important when companies start reporting. It will also be important to see what the analysts expect. Going forward, in the next 12 months, we expect a 27.3% gain in earnings, which would be very positive to see. We’d like to see that come up even higher. Based on the next 12 months, the market is currently trading at 23.6% multiple. What does that mean? It’s the price of the S&P 500 and where it’s trading at, divided by total earnings. It’s currently trading at a 23.6 times the total future earnings of the market. Why is that number important? That’s about 42% above the 20-year average so, it’s trading a little expensive right now which you would expect. The market typically gets expensive out of recession because participants look forward, not backward. That’s why, as we come out of last quarter’s earnings season, we really need to start focusing on what 2021 and into the future might look like. Can we get those earnings up to where that multiple really comes down? There are two parts of the price-to-earnings ratio. There’s a price that the market is trading at, and then the earnings. If earnings go up, that price can go up as well and the market can still become less expensive. As we head into hurricane season, there’s definitely winners and losers. There’s the consumption that has to happen with the gas situation. The gas prices may come from another retail source so things will depend on how we balance that. The total market seems to be poised for growth and showing that this third quarter is going to be a pivotal quarter. Not only with the companies reporting for the third quarter, but also what corporate management projects to expect in 2021 is important. As they get more clarity, they will probably be able to project out and the market can take those projections and reprice risk.

Technical Analysis

When talking about estimates, you don’t always see economic conditions match up with markets. This is why we dig down into the numbers from a technical analysis standpoint. Recently, we talked about resistance levels. We’ve seen the first resistance level of 3,300 hold since August 6th. On Friday, we finally saw the second level break 3,390. We want to see if this trend is going to continue, but at the same time, we want to look at the support levels at the bottom. Have markets ever gone through recession after S&P highs? The answer to that is yes. We’ve had that happen four times in history starting in 1962 then again in 1980, 1982 and 1991. That’s why we’re still keeping an eye on the support level as well as the resistance levels to see where the trend lies. From a historical standpoint, it’s great to review those years, especially under the conditions we’re in. From a historical standpoint, what was going on in this country during those times, and what happened to the markets after those times, is important to know for future evaluations.

Consumer and Manufacturing Numbers

Last week, there were two data points that we thought were particularly interesting. We look at the Consumer Purchasing Manager Index and the Manufacturing Manager Index. We also look at a blended version of the two. The blended Manufacturing Index and Consumer Index last week had the best combined months it’s had for 18 months which goes back past COVID-19. The second data point that’s very interesting is that there were a lot of executives and professional people that at the beginning of COVID-19 took pay cuts of 10 to 20%. Physicians and partners in law firms and engineering firms were among some of the higher paid people. A lot of that income now, as we’re getting a little more stable is being replaced. It’s coming back because they’re turning it back on. We think when you get into the fall those people are highly paid and they spend, so those two dynamics when we had September in sort of the latter part of this third quarter, we’re going to see that starting to pick up on the consumer numbers and thus to the technical.

 

Greg Powell, CIMA®
President and CEO
Wealth Consultant
Email Greg Powell here

Bobby Norman, CFP®, AIF®
Managing Director
Wealth Consultant
Email Bobby Norman here

Ashley Page, JD, MBA
Senior Vice President
Wealth Consultant
Email Ashley Page here

Trey Booth, CFA®, AIF®
Senior Vice President
Wealth Consultant
Email Trey Booth here

Adam Vansant, AIF®
Associate Vice President
Wealth Consultant
Email Adam Vansant here

 

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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