Stocks For Sale

Sorry for the busy chart. In a nutshell, after the current sell-off (perhaps the 15% drop from the recent highs might be a bit more than just a sell-off?) from the beginning of 2018 the S&P 500 (light blue) is up about a grand total of only 4% (was up 24% a week or so ago). Funny how all the debate over value plays itself out in time? Looks like the "wussies" (those who would not take the bait) from 2019 are ruling the day. 

And so are the conservative bond investors, with XBB (Canadian bond index ETF, green on the chart above) better by almost 7.5% (add on the annual income of about 2.5% for a total return in the vicinity of 12.5% or thereabouts).

As one of the so called "wussies", apparently, it appears that good judgement is, as it does in time, being rendered appropriate. That is, not getting caught up in the hype that the stock market "cheerleaders", bloggers and over-confident (see my blog on the subject) sellers of financial products who were doing a whole bunch of "carnival barking" until very recently.

As it always does, value returns (from over-value).

Our good friend David Rosenberg, a very seasoned economist (and former Merrill Lynch colleague of both mine and Paul's) and now running his own operation (Rosenberg Research, a global independent economic research and strategy firm) has also withstood his share of punches received along the way. He had this to say in his morning:

"The fact that the futures market has already priced in 90% odds of two rate cuts now by year-end hasn't exactly offered up much solace for the equity markets, which remain in freefall even with these revised Fed expectations towards an easier stance."

"The Fed is surely going to be cutting rates, and aggressively, but this time the impact won't help the problem because the problem wasn't caused by the Fed, as was the case in other periods"

"The bottom line here is that the virus has gone global, it is disrupting global supply chains and curtailing consumer demand everywhere. The economic turndown will cause financial pain because so much of the world, the corporate world, is awash in debt. And the impairment to cash flows will cause defaults and delinquencies to escalate".

"And we know in recessions, we get a 25% profits plunge and 5-point P/E multiple point compression. We are likely going to see all of last years's post -Powell-pivot rally erased. Goldman Sachs now projects no earnings growth at all this year and even that will be optimistic. But even if they are correct, the forward P/E on true reported earnings is over 22x even after this last correction, which is still above the historical norm of 16x. And remember, mean-reversion means you go through the mean. This alone would take the S&P 500 down to 2200."

As I write, the S&P 500 is trading at 2930 and trading fast. That would take us down another 24%. Yikes!

We have been putting some cash back to work at today's prices, picking up considerably better value than existed even in June and September of 2019 or even January and October of 2018.

There is, as usual, lots of debate as to how this will all play itself out (Coronavirus, U.S. election, recession). As usual, some may take us to task for being relatively conservative (some young guns, new to the idea of a recession hurting stock markets, think the S&P 500 will still hit 3500 this year). However, our jobs are to protect our and our High Rock Private Clients capital and get us growth over the long-term to see us to our collective end goals and that is what we shall continue to strive to do.

We will likely keep some powder dry in case the Rosenberg scenario plays out. His caution on the economy through 2019 has certainly played out.