The major U.S. equity market indexes continued to rebound, fueled by the slow reopening of the U.S. economy in the wake of the COVID-19 shutdown and the Fed’s ultra-easy monetary policies. The S&P 500 is now up 36% from its March 23 low and is up more than 10% over the past 12 months (although sector returns differed widely). The Fed’s balance sheet expanded significantly more in 4 weeks than in all the quantitative easing periods combined in the Great Financial Crisis of 2008. Meanwhile, government spending has risen to nearly 35% of GDP, a level exceeded only during WWII.
Per-share earnings for S&P 500 companies fell 12.6% in the first quarter from a year ago. Consensus expectations for second-quarter results are much worse, with per-share earnings expected to decline about 43% from mid-2019 and sales falling about 12%. But, the forward price/earnings ratio is rising faster than forward earnings are declining, pushing stock prices higher.
The stock market is pricing in a very sharp rebound in earnings in 2020, but with record unemployment and the strong liklihood that many small businesses will never re-open, that seems optimistic. Moreover, world trade has gone negative for only the third time since 1980, a damper on economic growth. Much will depend on the speed with which workers are able to return and how quickly consumers will feel comfortable engaging in services which require close interaction.
The post-COVID world will look very different for many companies and industries. The pandemic has accelerated several trends that were in place: a backlash against globalization and more nationalism, a U.S. – China schism, increasing resilience in supply chains and increasing digitalization, more robotics and more automation. Higher education institutions will face new challenges and some small colleges will likely fail. In many large cities, workers will continue to work remotely, and commercial real estate will suffer. Some predict a major population shift out of cities into suburbs and more rural areas. Some segments of the economy are going to do extraordinarily well in this, some are really going to suffer very badly, and others are going to do okay.
America has faced many challenges over the decades and has always come out stronger. Our ingenuity and entrepreneurship will enable us to do so again. While the pandemic and lockdown have taken their toll in human lives and economic livelihoods, America will rebuild. Unmistakable in this emerging post-COVID reality, experts say, are signs that human creativity will forge new approaches, new products, and new social paradigms. Thomas Edison, one of our greatest inventors, said, “I have seen many depressions in business. Always America has emerged from these stronger and more prosperous. Be brave as your fathers before you. Have faith! Go forward! There’s a better way to do it. Find It.”.
In the midst of all these changes, we do believe that dividend-sustaining companies are going to prove to have been one of the bright spots not only in the bounce back out of COVID but in the ongoing volatility that we're sure to see as we climb through and eventually out of recession.
The LVM Team