Monthly Markets Memo - April 30, 2020
by Dan Zalipski, CFA
The market has staged a remarkable rebound off the March 23rd lows, aided by swift responses from the Fed and Congress to cushion the economic impact of the coronavirus pandemic. As of the time of this writing, the S&P 500 has recovered 28% from the recent low but remains down just over 10% on the year. The initial rebound has been surprisingly strong considering the jaw-dropping unemployment numbers and uncertainty around when the U.S. economy will be able to safely reopen. Our recent writings have covered the response from leaders, but with earnings season underway we are beginning to hear directly from the companies.
Companies routinely provide forward looking guidance on expected earnings for the coming quarters. However, due to the uncertainty of the coronavirus pandemic, several companies have withdrawn or failed to provide this forward-looking guidance. As of April 24th, 122 companies within the S&P 500 had reported earnings. Of those 122 companies, only 20 have provided earnings estimates. The companies pulling guidance are those operating in sectors most impacted by a sudden drop in economic and consumer activity, such as consumer goods and industrials. First quarter earnings growth is currently on pace for a decline of -15.8%. With the economy shutting down late in the first quarter, it would be easy to see a similar or worse drop in earnings growth for the second quarter earnings. This would be highly dependent on how and when the economy begins to reopen.
Guidance is not the only thing companies are struggling with. The uncertainty around their future revenue has companies moving to preserve cash. One way to do this is to cut or suspend their dividends. As of this writing, 11 companies have decreased their dividends, with 20 suspending them altogether. The companies suspending their dividends operate in some of the hardest hit industries including cruise lines, casinos, hospitality, and retail.
A staged reopening of the economy is likely, with timing to vary across the country depending on local conditions. It is believed that the U.S. economy will regain a position of strength once the pandemic is behind us. The market rebound stands in sharp contrast to these companies pulling guidance and cutting or suspending dividends. These companies are struggling with what the next few quarters hold for the U.S. economy. It is for these reasons that we expect the market to remain range-bound and volatile, and we continue to promote patience.
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