Record Jobless Claims (30 Sigma Event)

Where Will Earnings End Up?

Some investors are completely ignoring where 2020 earnings will be because recessionary earnings are a temporary dip. Other are calling for the end of the world because earnings are crashing. Some are in between. We should be looking closely at earnings. It gives us a guide as to how low stocks can go and how easy the future comps will be. And it gives us an idea of where 2021 earnings will be. That's probably more important than 2020. 

We look at 2020 earnings to give us the worst case scenario. For example, Goldman Sachs called for $110 in S&P 500 EPS which would bring us to 1,650 on the S&P 500 if there is a 15 PE. If the S&P 500 falls near 2,000, then we know the downside is limited. Our upside is high in the intermediate term because earnings will likely significantly rebound.

As you can see from the chart above, S&P 500 EPS could have been $168.98 if we followed the average change in estimates. 2020 would have beaten the average because the economy was coming out of a slowdown. EPS could have been between $170 and $175. S&P 500 would be at 3,105 with an 18 PE multiple and $172.5 in EPS. S&P 500 was at 3,386 at the peak, so you could say the market was due for a modest pullback. 

Some had been calling for a correction in January, then mistakenly went bullish after Bernie started doing poorly in the Dem primary. Shockingly, the odds of Cuomo winning the nomination have spiked to 8% even though he’s not running. Betters probably think he has done a good job dealing with COVID-19 in New York.

With the recession upon us, Strategas is calling for $139 in 2020 EPS. That’s probably too high. If EPS follows the previous 2 recessions, there will be $118.37. This recession will be worse for firms because the economy has shut down. There could be losses in Q2. Goldman’s estimate for $110 in EPS is the most accurate. But it's unlikely that the S&P 500 actually falls to 1,650. 

If it did, it would encourage buying because it would price in all of the downside and none of the potential earnings pop in 2021. Selling stocks at 1,650 means you think COVID-19 will come back in the fall and ravage the economy again. That's unlikely because countries have better testing. And people know how to shift to social distancing quickly. Plus, there might be a cure by then. One therapy expects to come on line in September.

30 Sigma Event

This was a 30 sigma black swan event for jobless claims. You had to have been living under a rock to not know that jobless claims were going to hit a record high in this report. Recently I predicted claims would be 2.5 million. Then the day before the report, I suggested that claims could beat the highest estimate on Wall Street which was 2.737 million. 

That was correct as claims rose from 282,000 to 3.283 million in the week of March 21st which is the highest number of claims by far and the highest on a population adjusted basis.

As you can see from the chart above, if claims keep their correlation with the unemployment rate, it will rise to about 20%. It's doubtful it will rise much in the March BLS report because the survey week was the prior week. As of February, there were 5.787 million unemployed people. 

If that increases to about 9 million, we could have an unemployment rate between 6% and 7%. That’s the bare minimum the unemployment rate will be in April when this data is fully reflected in the BLS report.

Many are saying the number of claims will increase next week. If it does, we will be looking at double digit unemployment in the April report. It was only couple weeks ago when there were forecasts for the unemployment rate to peak at 9%. That was too bullish. 

Morgan Stanley’s estimate of a 12.8% unemployment rate may have been the most accurate forecast. To be clear, at some point in the next few weeks, claims will fall because the majority of people who lost their jobs will have filed. Once the shutdowns end starting in May, the number of claims will fall.  

Big Stimulus

Fiscal and monetary stimulus plans are the biggest in history. This has put a bottom in the stock market even though regular people are still struggling. The market was oversold and priced in the weak economy before it happened. Secondly, the market is looking ahead to 6 months from now when the economy is improving. And the Fed is supporting stocks more than ever. 

Only potential negative catalysts are if the number of daily cases in Italy reaches a new high or if the number of cases in America doesn’t stop increasing 2 weeks from now.

As you can see from the chart below, the stimulus package in 2020 is 9.3% of the economy which is much more than the 2009 stimulus which was 5.5% of GDP. That’s on top of the 2018 tax cuts. It makes sense that this one is bigger because more industries are in trouble and potentially more people will be unemployed. There might even be another stimulus this fall depending on how COVID-19 goes.

Stimulus is just a term to use for fiscal expansion. Technically, this is more of a lifeline than a stimulus. This aims to keep the economy from cratering rather than trying to boost growth. As the chart below shows, 33% of people will use the $1,200 checks to pay down debt or pay bills. 

27% will save it. 26% will purchase necessities. Only 6% will treat themselves and only 4% will invest it. By the time the economic shutdown ends, this money will be long gone.  

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