Market Recovery: 2020 vs. 2009

Courtesy of our friends at FundStrat.

After closing at a low of 2237 on March 23rd, the S&P 500 has rallied back by approximately 25% to around 2800.  Market observers have recently surmised that the stock market is expensive if one’s measurement tool is next 12M EPS… but that is not what determines future value.  Some have noted that equities have gone “too far, too fast” and that stocks risk/reward is not attractive.  Those cautious statements by investors are reasonable.  

S&P 500 2020 EPS is likely to be $50 or lower, compared to $160-$170 at the start of this year.  There is simply no way for companies to produce earnings when much of the economy is simply shuttered.  But this does not mean we think the S&P 500 should be valued at 20X x $50, or 1,000. 

We are highlighting the challenge of using valuation techniques on equities at turning points — at market tops, stocks P/E should be low (because future earnings will fail to deliver) and at market bottoms, P/E should be high (even ridiculously high) as future earnings should surprise.  And we have written several pieces on why EPS should be stronger than GDP — namely, companies will be cutting costs during this contraction, and as such, will need a lot fewer revenues to achieve the same EBIT/EPS.  Thus, future earnings growth should surprise to the upside.

To get some perspective on today, I want to take us back to June 24, 2009.  On CNBC, Warren Buffett was interviewed about the state of economy.  Buffett is considered by many to be considered one of the most experienced and least biased investors.  In that interview Buffet made the following observations:

– “Everything that I see about the economy is that we’ve had no bounce.”
– “I said the economy would be in a shambles this year and probably well beyond”
– ” I thought maybe now I’ll be able to see green shoots.  We’re not seeing them.  Whether it’s retailing, manufacturing, wherever. “

The S&P 500 had rallied a stunning +43% from the March 9, 2009 lows of 667. The economic visibility was NON-EXISTENT.  But stocks were rising.  As you can see below, the S&P 500 had a V-bounce at that time.

Today, people look back and say “Warren Buffett was buying stocks in 2009” and point to his purchase of Burlington Northern for $34 billion, the largest ever deal for Berkshire Hathaway.  The Burlington Northern deal was announced on November 3, 2009, 6 months after the March 2009 low and 3 months after his CNBC interview with Becky Quick, where he “saw no green shoots.” 

By November 3, 2009, the S&P 500 made the 50% retrace of the entire bear market — ala, 2,794 today…
– in other words, by the time the Burlington Northern deal was announced, the S&P 500 was already 6M past the bottom and retraced half of the bear market losses.
– Buffett was recently interviewed (two weeks ago), and said he had not put any money to work in 2020.  But now would be the equivalent time to Nov 2009.

The point we are making is that in 2009, even 3 months past the bottom, there was zero economic visibility.  Even November 2009 was early and the move by Buffett (back then) was considered bold and even “much on faith” because the economy was simply still in shambles.

In our view, one of the least appreciated aspects of market declines and recoveries is the symmetry.  Something, we have highlighted in past reports.  The faster the decline, the faster the recovery.  And in 2020, the market’s high-speed decline suggests a symmetric high-speed recovery.

How does this apply today?  Well, there is evidence the economy has bottomed.  And stocks historically bottom before jobless claim peak and before GDP troughs.  This is an unusual business cycle, because as Fed’s Powell noted today, it was not caused by an excess of inflationary pressures, leading to a tightening cycle.  This is a pandemic led to collapse in demand.  But as highlighted recently by Goldman Sach’s Chief Economist, Jan Hatzius, the “US economy now appears to be through the trough.”  Therefore if the economy is past the trough, then the S&P 500 2,192 level is the low (that is Fundstrat’s view). 

We do not know for certain what the low will end up being.  However, it bears understanding how markets have reacted with respect to economic recoveries of the past.  Every market scenario is unique to some degree and we continue monitoring the many moving parts present in the current economic environment.