Fed Saves The Day

Beginning of Earnings Season

The start of Q1 earnings season has been good because the firms reporting earnings ended their quarter at the end of February. They barely had any impacts from COVID-19 in their reports. This would have been a great quarter for firms if COVID-19 didn’t spread widely. With the first 14 firms reporting results, 93% of them have beaten EPS estimates on -1.64% growth. 86% of firms beat sales estimates on 5.59% growth. 

Keep in mind that when firms report their results that include March, they will also beat estimates because estimates will be lowered substantially. Firms almost always beat estimates. That’s why it’s important to look at absolute growth and the rate of change of estimates.

As you can see from the table above, estimates have come down very sharply in the past few days. Now Q1 EPS growth is expected to be -4.52%. That’s down 3.97% from the start of the month. There is no chance growth will be positive. It might end up worse than -5%. Q2 EPS estimates have crashed further, but have more to fall. They fell from 3.48% to -5.09% in 25 days. We should see estimates fall below -10% within the next week.

On the positive side, we can look forward to Q4 EPS growth estimates falling too far and analysts either raising them or firms beating them sharply. So far, growth estimates are still 4.49%, but in the next couple months we will see them crater. At that point, it will make sense to expect a positive catalyst because the economy might be recovering by then. 

Many investors are fully on board with the thesis that the economy will have a quick recovery. Especially based on the recent recovery in China and Wuhan opening on April 8th. New York should reopen in May.

Summary Of Fed’s New Policies

A main reason for being bullish is the Fed’s latest policy to buy corporate debt. It cancels out the uncertainty about the coronavirus. Is the coronavirus now contained because of the Fed’s policy? Absolutely not, but stocks have been falling because of liquidity issues which are being eliminated. 

Personally, I’m encouraged by the stabilization of the number of new cases in Italy per day. Number of new cases per day in America will likely peak in April. 

The table above summaries each new Fed policy aimed at adding liquidity into the financial markets. Goal is to ease financial conditions. Some investors thought the Fed was done after it cut rates to zero, cut the discount window rate by 125 basis points (eliminating the stigma of using it), and expanded repo operations. However, that was just the beginning. The Fed is throwing policies against the wall and seeing what sticks.

A big policy was using special purpose vehicles to essentially borrow corporate bonds. Technically, the Treasury adds cash and the SPV borrows from the Fed. Either way investment grade corporate bonds are being supported (announced on Monday) along with muni bonds (announced on Friday). 

Some are criticizing the Fed for going too far, which is a good thing. If the Fed would have been tepid, we would have been in the situation we were in 2 weeks ago where markets were crashing and illiquid. These policies don’t cure the coronavirus, but no one expects them to.

As you can see from the chart below, after the Fed announced it would buy corporate bonds, the LQD ETF, which had been crashing, increased. This is directly helping the market opposed to QE which we can consider to only boost sentiment. QE is nothing compared to the latest Fed actions.

COVID-19 Shuts Down The Economy

This situation has led many to stray from the typical establishment and survey report data. They didn’t predict this recession because only someone following the Chinese outbreak closely could have done that. This doesn’t mean economic data is useless. It usually works, but this was an exogenous shock. It had nothing to do with the fundamentals of the labor market or corporations.

Because economic reports are much too delayed for a fast moving market. So we're focused on non-traditional economic data that captures this weakness quickly. That’s why I personally follow Open Table restaurant bookings, which fell 100% in America from March 21st to the 24th.

Another example of this type of data is seen in the chart below. It shows the number of TSA checkpoint airport passengers in 2019 and 2020. Airline passenger traffic is down 90% from last year. Unlike in China, American data is still getting worse. If you wait for the traditional economic data to start getting better, you will miss the stock market bottom by a few weeks. 

If you wait for this updated data, you’ll be closer. You don’t necessarily need to capture the bottom perfectly. There will be plenty of gains for you to have if you wait for some confirmation that the economy is rebounding.

Consumers Need Money Now

Consumers aren’t in great shape to deal with any kind of weakness in the labor market even though they are much less leveraged that they were prior to the last recession. As you can see from the chart below, 33% of consumers have less than $100 to deal with an emergency or job loss. 

Good news is unemployment insurance exists and is being bolstered by $600 per month for 4 months. Plus, there will checks of $1,200 give to everyone making under $75,000 (children get $500). Most people without an emergency savings account make less than $75,000. It’s scary that only 43.4% of Americans have over $1,000 in savings. You’re supposed to have 3-6 months of income saved up. 

Average weekly earnings of private employees is $981. If you multiply that by 13 to get about 3 months of savings, you wind up with needing $12,753. Not that many people came into this situation financially prepared!

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