Anything But Normal

August 10, 2020

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Around 75% of companies have reported 2nd Quarter earnings and so far, it looks as though that earnings for the S&P 500 will come in around 35% below what they were in Q2 2019. This is the way earnings are measured by Wall Street, comparing the recent quarter against the same quarter the year prior, mainly due to the seasonality of some companies. A measurement of Q2 say over Q1, would not give you a fair measurement of growth or as in this case, retraction.

Good Q2 Earnings Season, From Depressed Estimates

Even though -35% sounds terrible, it’s turning out to be way better than was looking to be forecast at the start of the shutdown. This gives me comfort in the estimates that we have for the year end of around 150, which will be around a 10% year over year decline.

Technically the market is still on a positive footing. We are reaching higher highs and the 50-day moving average is still on a nice upwards trend. We’re not seeing the overbought signal from the relative strength index at this point, despite our high price to earnings ratio.

S&P 500 Forward P/E
S&P, SMA 50, SMA 200

This rally has been anything but normal. The performance has been totally biased towards the larger organizations. Currently, the S&P 500 is 2% away from all time highs, however there are 51% of the stocks within the index are down over 20% from their highs! Dividend paying stocks, usually favored in times of economic downturns have really suffered. The chart below shows the higher the dividend, the greater the negative return. I can’t remember ever seeing this in my career.

S&P 500 Stocks YTD Returns based on Dividend Yield
2000: S&P 500 Average Performance by Market Cap

Speaking of seasonality, this time of year for the market has generally been lackluster. A measurement of the past 60 years shows the next 6 weeks has been a time for a pause. Single out the election years, then you can see from the chart below, the next six weeks have actually given up some gains.

Seasonality Headwinds

The right side of the above chart is an interesting tidbit. It shows the returns of the market 3 months before the election can be a good predictor of the ultimate winner. 83% of the time since 1928, when the market is positive the incumbent wins, and if the market is negative you see a change in party.


As I write, the parties are still trying to thrash out the next stimulus deal. I’m using the package as my catalyst to become a little more conservative, at least leading into the election. I’m growing more concerned with upcoming potential volatility, and the best thing you can have in times of volatility is cash. The massive amount of stimulus I believe will provide a safety net to the overall market, however I do believe the next three months will provide some rotation from what’s been working well to what’s lagged. That’s a rotation from large cap to small, U.S. to International, and even growth to value.

I’ve updated the Buy/Sell to revert back to a yearly number rather than quarterly. I initially changed it through the shutdown so we could visually get a fair value of the market price based on earnings losses broken down by quarters. I argue the market is priced today based on expectations of earnings 6 months ahead. That puts us into mid first quarter next year, and most of us feel like earnings will get back to positive by that stage, so it makes sense to have the Buy/Sell reflect it.

As always should you have any questions or concerns, please give us a call.

S&P Buy Sell

Mick Graham, CPM®, AIF®
Branch Manager Raymond James
Financial Advisor Melbourne, F

Mick Graham, CPM®, AIF® Branch Manager Raymond James Financial Advisor Melbourne, FL

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mick Graham and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor.

International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

Dividends are not guaranteed and must be authorized by the company’s board of directors.

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