Two topics to discuss with you today:
Item #1: An update on our 2009 Playbook, a comparison of this year’s rally off the lows to the one at the end of the Financial Crisis. We use the closing lows for each (March 9th, 2009 and March 23rd, 2020) and chart daily returns. Here’s how that looks as of today:
The match is eerily close, and 105 days from the 2009/2020 lows the S&P is just slightly better (2 points) than back in 2009 on the same trading day. If you’re bullish, the fact that the 2009 experience points to a further 11% gain between now and year end is welcomed news.
Three further thoughts on this comparison, both for good and (potentially) bad.
- The leadership groups in the 2009 rally were much different than in 2020.
Financials doubled from March 9th 2009 to this point in the 2009 rally. That move gave investors a valuable signal that perhaps the Financial Crisis was over and that equities were safe to buy again.
The narrative in 2020 could not be more different. Big Tech is leadership as it gains consumer and business share of wallet and attention. More on this in a moment…
- 2009’s rally occurred after a US Presidential election, where 2020’s move is happening just ahead of one.
In many ways 2009 was such a good year (+26% for the S&P 500) because 2008 had been so bad (-37%). One reason 2008 was so horrible was the delay in providing fiscal stimulus (ARRA) until February 2009. Lawmakers barely passed TARP in 2008, and with the November election and change in power there was no consensus about fiscal stimulus until a new President and Congress took office in early 2009.
This time around, the S&P 500 is heading into election season at essentially full throttle. Fair enough – it’s logical enough to believe that no matter which party wins White House and Congress there will be further fiscal stimulus. But this is clearly different from 2009.
- The belief in a powerful rebound in corporate earnings is the most important similarity between 2009 and 2020.
During the Financial Crisis, S&P 500 annualized earnings went from a trough of $43/share (in Q1 2009) to $57/share at the end of 2009 to $91/share in mid 2011, a new record high.
This time around, S&P earnings are troughing at $117/share (in Q3 2020) but analysts expect they will be at fresh record highs ($163/share) by the end of next year.
Summary: ultimately the 2009 – 2020 comparison is a reminder that 1) bottoms occur when government policy responses match the scope of an economic downturn and 2) the nature of the market’s recovery will vary by sector, but the aggregate return (driven by a sharp earnings rebound) is closer than one would think likely.
Item #2: How does the S&P get to 3,800? Back on April 14th we published a piece titled “S&P 3,200: A Roadmap.” While it seemed a stretch at the time, we said that level was achievable if Tech simply got to a 10% premium to its February highs, Facebook and Google got back to those highs, Amazon went 25% beyond them, and Health Care saw a market multiple. Given how the COVID Crisis was accelerating technological disruption, this scenario seemed plausible.
The only piece we whiffed on was Health Care valuations, because even though this has been a strong performing group Tech has done so well that the S&P trades for 22.3x now. Health Care is still stuck at 16.6x. Everything else on that list came to pass and the S&P now trades for 3,400.
It’s time to update this analysis to consider what has to happen for the S&P 500 to reach 3,800. That’s essentially where the 2009 playbook says it should go by year end (3,763 to be precise). Three thoughts on this:
#1: Forget about cyclical rotation driving stocks higher if that means Tech + Google, Amazon and Facebook falter along the way. These stocks are collectively 38% of the S&P 500. Financials and Industrials (together 17.8% of the index) could rally 10%, but if that meant a 5% pullback for Big Tech then the S&P 500 would remain unchanged.
#2: We need to see earnings estimates for 2021 continue to rise. An S&P 500 rallying with a 22x multiple means just one thing: investors think next year’s earnings are going to be better than expected. The latest FactSet data (chart below) shows this is happening, but it has to continue. That means we need a steady drip of better than expected economic data.
#3: Whatever happens with the November elections needs to be decisive. Remember the lesson of 2008 from Item #1: political dead zones hurt stocks if the US economy is on shaky ground.
Summing up: we remain positive on US equities but are fully aware that the next 10% on the S&P will likely be a more difficult slog than the last 50%.