March 2020 Newsletter

Backdrop, What We Know, Don’t Know, Current Management Strategy and Expectations in a Year

A few days ago, I sent you a March 9th report from Credit Suisse Research describing their analysis of S&P 500 earnings for 2020. After accounting for disruptions from the Corona virus and the collapse of pricing in oil, they have concluded the S&P 500 will end the year having earned $165. This is approximately the same estimate for earnings reached by Goldman Sachs and RBC Capital’s Lori Calvasina. Calvasina’s work, accounting for several stressors, was just announced this morning. They could all be wrong. It could be that the S&P earns only $160 in 220. They’re more likely to be wrong on the multiple the market gives the S&P’s earnings. Let’s look.

Estimating the Lows

The low multiple for most major pull backs is 15.5. So, 15.5 x $165 tests the bottom at 2,557. When you’re panicked however, you’re likely to want more proof so you estimate a lower figure such as $160. So, 15.5 x $160 is 2,480.  If you wanted even more insurance, you could set your multiple at 15 or 15 x $160 is $2,400. The absolute low I heard is a low of 2,325 based upon 15.5 x $150. That might be the market low.  Now things could go lower, though the probability of much lower is very low in the face of a 5-standard deviation sell-side panic with policy makers likely to act soon.

The average 20% correction lasts approximately 245 days. That included the sharpest decline to recovery.  A larger decline can lead to a recession, if we have one.  Recessions typically last six months to three years and represent two quarters of negative growth. No one is concerned about a three-year recession since this isn’t a leveraged financial crisis. Lower interest rates will make housing excitingly affordable and the housing market has been the factor leading the U.S. out of recession in every recession since WWII. The shortest recessions tend to be born of Black swan events like those we are witnessing now. That is, the game of chicken Russia and Saudi Arabia are playing with oil, or a pandemic that abates in a few months.  The market pullback is a statement a recession is forthcoming. So, here’s that looks.

First, the low end of the trading range will have been put in by the time the recession takes hold. When the number of cases peaks in the U. S., the market will begin to rally. It did just that in China recently. At the very stage that more people are losing their jobs the market should be moving up and up. Why? Virus abatement, secure earnings estimates, and low wage-rate inflation is fertile soil for a bright future. The opposite of that is what you’re seeing now, large job loss numbers are not to be found. We all know that once test kits are everywhere virus numbers will climb.  Earnings estimates are a mystery. That projects the question, “How bad is it?” When no one knows, the mind turns to a worst-case scenario. Fear sets in. This can lead to panic or just freezes in normal investment plans. 


A few months ago, with the sense this market was trading near a high end of the trading range, I began to hedge portfolios by including gold, short-term bonds and money-market holdings in accounts.  I brought the total of this group to some 20-25%.

So now that the market is much closer to a bottom and far from a top, it makes sense to sell gold and short-term bonds to add to cash holdings as it may be that the bottom on the S&P 500 is put in in the next few days, weeks or months. As such, yes, gold will go higher with all the world’s major central banks printing money causing currency values to decline. However, stocks now have much more upside than gold or short-term bonds.

This larger-than-normal cash balance should give you confidence that your portfolio is capable of rebounding faster.  For now, it’s too late to sell and too early to buy. This is the first stage of a bottoming process.  I estimate we will begin nibbling on extreme oversold positions by May-June is my estimate. By then the emotion of selling should have abated no matter what the bad news.

This Time Next Year

 By this time next year, you should have witnessed the market’s return to normalized multiples (18) and more hopeful earnings estimates for the future. By this time next year, expect an oil patch solution, the fast virus test kits everywhere, coordinated monetary and fiscal stimulus in Germany, the United States and China, a reduction in supply-chain worries for companies such as Apple, the introduction of 5-G phones and a new cooperative spirit among trade partners. In such a case the following math applies: Note I use an 18 multiple since this is the average multiple during a low-rate investment environment.

$176 x 18 = 3168

$170 x 18 = 3060

$165 x 18 = 2970

$160 x 18 = 2880

Once the low end of the trading range for 2020 has been established (estimate 2283-2450) through a grinding away investors may experience emotionally as “all hope is lost,” the scenarios above will begin to form and represent a high probability of expectation, no matter the winners of the November elections.

Best Regards,

Vaughn Woods, CFP, MBA

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 her is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  VW1/VWA0245.