August 2020 Newsletter

Sometimes it feels like the world is changing faster than reports get to you. There are so many significant issues affecting the financial markets, interest rates, negative net yields on the 10-year treasury, gold, the decline in the dollar, pandemic-market correlations, fiscal and monetary policy successes, and earnings.  Each of these topics can account for reasons to engage in asset allocation rebalancing to remain in tune with the realities of change.  Then again, there are reasons to talk about the thematic issues that don’t matter. Politics comes to mind.  

Politics is a slow-moving force within a larger economic mindset. We all know how important this election is for so many reasons. The wrong politician has sufficient power to start a war, push the button, suffer the poor, divide the nation, trash the rule of law, resort to selling our national technical secrets to competing world powers, appease Chinese espionage, weaken our constitution, put down our religious heritage, fund hit squads, or on the contrary, bring us all together toward one great effort that benefits the world. Politicians and their schemes are therefore dangerous as they can accelerate or defeat the progress of class mobility, free enterprise, self-actualization, self-esteem, love and belonging, personal security, and basic physiological needs, Maslow’s hierarchy of needs.  

So, we vote and pray. But it is the underlying profit of U.S. corporate strategies that presents the most immediate reason you can retire, remain retired, give to charities, pay for emergencies, help others in a  time of need, pay off your mortgage, maintain an attitude of financial confidence and remain relatively free from the financial stress that disrupts physical and mental health. One of the best-known metrics for the strength of American innovation and power is the S&P 500. It’s math. Financial progress is math. So, I pose to you the following three questions to illustrate a point.  

  1. Which is more important your favored candidate winning the election or the total earnings expectations for the S&P 500 in 2021?  
  2. Which is more important, the government of India threatening nuclear war against its neighbor Pakistan or U.S. GDP growing at three percent, annualized?
  3. Which is more important, an unemployment rate of 12% or the coming of the 5-G high- speed internet technology?

Answers: Call it pragmatism or the lament of a chosen economic system, the poor are not accounted for in the measurement of stock markets (is there a different way to say this?  The measurements of stock markets do not account for the variations of the poor, middle class or wealthy), whether it be a system of socialism, capitalism or communism. Each economic model constrains or facilitates the enhancement of personal wealth and freedom to its citizens. All three systems can be harsh, unjust, or the motivation to work harder and an environment in which it is possible to achieve economic growth.

In the United States, the most effective measurement of economic progress is the S&P 500. These earnings do not account for the suffering of the poor, the ingenuity or creative imagination of products or services yet developed.  No discount for future earnings is considered by market participants when, for example, the government of India threatened Pakistan with nuclear annihilation because there is no discount for global thermal nuclear war. Only current and future (6-12 months) earnings count.

State lockdowns have forced an unnatural collapse in corporate earnings. The path to higher earnings was disrupted. So, whereas the Trump administration stated with pride that unemployment had reached a 50-year low of just 3.5% in September of 2019, by March of 2020 earnings were projected to be just $128, a depression scenario.

See below the earnings progress that lead to a 50-year low in unemployment in 2019.

Dec. 31, 2019     139.92

Dec 31, 2018       135.85

Dec 31, 2017       114.90

Dec 31, 2016       100.96

Dec 31, 2015       94.31

Dec 31, 2014       112.32

Dec 31, 2013       110.84

Dec 31, 2012       97.13

Dec 31, 2011       99.33

Dec 31, 2010       90.98

Dec 31, 2009       60.85

Dec 31, 2008       18.25

The S&P 500 earnings experienced in December of 1902 ($18.97) equate to the disastrous decline in earnings ($18.25) in 2008. The U.S. population in 1902 was just 79.16 million. That same year, President Teddy Roosevelt was the first president to ride in an automobile.  In 2008, the capacity to facilitate an economic rebound was assisted by a population of 304 million, the modern digital age, and $13.9 trillion in temporary loans, liability and asset guarantees committed by the Federal Reserve and U.S. government.

In 2019, the U.S. unemployment rate fell to a 50-year low (3.5%) on S&P 500 earnings of $174. Prior to our modern pandemic, consensus 2020 earnings expectations for S&P 500 stood at $177. Four months later after the CDC changed its projection of COVID-19 cases from “limited” to a “growing threat.” The rest is history. S&P 500 earnings are currently expected to decline to $146 in 2020 and that’s up from previous estimates, which in March of 2020 stood at $116.

As of August, the latest employment report shows that the U.S. economy is in recovery mode. Human behavior is working to moderate the lockdown effects of daily life. So, if the worst is over, even should a second wave of cases ensue, we may be witnessing the worst-ever post-war collapse in S&P 500 earnings followed by the best-ever rebound. But why is this happening?

We know the reason for the collapse. Some of the reasons for the velocity of the rebound are:

  • $6+ trillion of fiscal spending,
  • monetary policy bringing mortgage rates into the twos,
  • wartime funding policy measures to quickly find a vaccine,
  • international collaboration on research, testing, treatment, vaccine production and distribution,  
  • public behavior moderation in the face of new lockdowns,
  • education: an evolving world of remote proctoring, self-educating, face-to-face, chatbot and AI assistance, a significant probability something good is developing here,
  • PPP funding and the uptick of re-hiring,
  • waning willingness to sacrifice freedom over lockdown requirements,
  • recognition of the desire to socialize is gaining over safety,
  • adjustments by service businesses and restaurants to accommodate consumer demand through delivery, takeout, digital formats, masks and distancing.  

Models for S&P 500 earnings could vary greatly in the coming months, but for 2021, consensus estimates are now moving toward $177. This change is substantially higher than any post-war period and could occur in a much shorter time frame. We’ll be going from forced constraint to immediate recovery. Of course, there will be pullbacks. The current overbought/oversold oscillator sports a significantly overbought number. However, these dips should reflect a temporary correction rather than a return to the lows witnessed between March and June of this year. In each of the previous recoveries when the S&P 500 traded at lofty multiples, the stock market rose over the next several years while simultaneously becoming cheaper, the result of earnings growth into normalized consumer activity.

So. if earnings do trend upward in 2021 to an S&P 500 estimate of $175-180, it is possible to conceive of a price-to-earnings multiple of 20. That’s below the current multiple of 26. In such a case, the S&P 500 could reach 3,600. That’s approximately an 8.4% improvement, accounting for dividends.  

In this rebound scenario you can expect to see interest rates on the 10-year treasury move higher. This will force fixed-income investors to move away from bonds and toward dividend-paying stocks, further sustaining equity multiples as earnings rebound. 

Again, thank you for your continued faith and confidence in all we do to hit the sweet spot of account preservation, income and growth tailored to your unique needs through listening, research, communication and experience.



Vaughn Woods, CFP, MBA

Vaughn Woods Financial Group, Inc.

2226 Avenida De La Playa

La Jolla, CA 92037

Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal.  Past performance is not a guarantee of future results.  Asset allocation cannot assure a profit nor protect against loss.  Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed.  Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management.  The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  VW1/VWA0252