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We hope that you and your families are safe and well during this challenging period. We are grateful for the health and safety of our team members, and our thoughts are with those most affected by the pandemic and with the extraordinarily brave healthcare workers on the frontline. LVM staff have mostly been working remotely, and we’ve been fully operational throughout the crisis. We are proud of how our team members have come together and how seamlessly they have made this transition.
The black swan for the economy and the capital markets has been the total national lockdown. While hundreds of thousands have been afflicted with the coronavirus in the U.S., tens of millions have lost their jobs due to the mandated shutdowns. The pandemic’s economic earthquake is likely to trigger a wave of corporate distress and bankruptcy. Many small businesses that have been closed will not re-open, leading to some permanent job losses. While the economy remained strong in January and February, the March shutdown produced a first quarter GDP, or output of goods and services, of negative 4.8%. Estimates for the second quarter are as low as -40%, the worst since the Great Depression.
With over half of the S&P 1500 companies reporting their first quarter earnings thus far, results were heavily impacted negatively by the last two weeks of March. Second quarter guidance in many instances was either sharply reduced or withdrawn (approximately 1/3 of companies have withdrawn guidance). Most managements simply can't make any forecasts without knowing when or at what pace our economy will reopen. While many have an opinion, no one knows.
In the face of this negative news, the S&P 500 has rallied 30% from its March low. The sustained gain in stocks over the past several weeks reflects some combination of central bank action and hope for positive therapeutic results that could help reduce mortality fears over the next several months. Should that hope be realized, the rate of recovery could be swifter than many now expect. Indeed, there are at least 70 different coronavirus vaccines in development by drug makers and research groups according to the World Health Organization. The race for a coronavirus vaccine is moving faster than expected, with Pfizer and others saying they have accelerated testing and that a vaccine could be ready for emergency use in the fall. Many companies are also working on a treatment. Wednesday, Gilead Sciences announced that in a trial conducted by the U.S. National Institute of Allergy and Infectious Diseases, its experimental coronavirus therapy remdesivir helped patients recover several days faster than under standard care.
We have also seen a massive fiscal response seeking to offset the economic damage created by the response to the virus. The government has provided more than $2.6 trillion in economic assistance over the past two months, and Fed Chairman Powell lauded those efforts Wednesday at the close of the Fed's two-day meeting. “Will there be a need to do more, though? I think the answer to that will be yes,” he said at a news conference conducted remotely.
The market is pricing in an economic rebound later in the year and a return to normalized earnings in 2021. Current consensus earnings for the S&P 500 for 2020 are $134.92 rising to $170.04 in 2021 (a 26% increase). The index is selling for 17.3 times the current 2021 estimate which continues to fall. At this point, no one knows when life will get back to “normal” and how quickly earnings will bounce back for these companies. And there is no certainty about whether we will revisit the March lows or continue the upward move in stock prices. Indeed, there is never any certainty about short term moves in the stock market because the short term is primarily a function of investor emotions. Longer term, however, stock prices will reflect the revenues and earnings of companies that people work to improve every day.
We continue to invest in companies with sustainable earnings power, free cash flow and strong balance sheets in your portfolio. Despite the volatility in stock prices this year, the vast majority of the companies you own have increased their dividend payments – this year and for many years– and we would expect that to continue in the future.
The LVM Team