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August market report: Bullish over two years

August 21, 2020

Our two-year outlook for many areas of the stock market is bullish. For that reason, we are recommending, as suitable, that clients “let equities run” above target equal to 5% of their total portfolio, even though we expect dips and challenges along the way.

Many stocks are still beaten down due to COVID-19. For example, as of Aug. 7, 2020, the S&P 500 was near all-time highs and yet 40% of its stocks were still down 20% or more from their highs1. As COVID hopefully resolves, we expect most of the “beaten down” stocks to largely come back as opportunity is restored. In some cases, the company’s bridge to that opportunity will be the unprecedented assistance from federal stimulus packages and the Federal Reserve Board. Here is an example of four companies that bring this concept to life.

Rate of Return graph for Google, 3M, GM and Delta

 

  • Google experienced a quick rebound even as the health crisis continued.
  • 3M posted declines in all its business groups.2 3M CEO Mike Roman noted “While our results were significantly impacted by the global economic slowdown, we executed well, managed our costs and delivered another quarter of robust cash flow,” and added “We are taking actions to navigate near-term challenges, while relentlessly innovating for our customers and investing for the future to lead out of the slowdown.” 3
  • General Motors’ vehicle sales fell 34% from a year ago due to consumers delaying new vehicle purchases and lack of dealership inventory with production plants closed for two months.4 GM North American plants reopened in the second half of last quarter.5 According to the Federal Reserve, new vehicles sales in the U.S. for April dropped to approximately 50% of pre-COVID sales but has since rebounded to approximately 15% less than pre-COVID sales.6
  • Delta: Airlines are one of the industries hit the hardest during the pandemic, with what feels like a perfect storm of issues: diminished demand, global travel restrictions, increase in video business meetings, and empty seats for social distancing. Last quarter, Delta’s passenger revenue was down 94% year-over-year.7 Delta has survived by receiving $5.4 billion in bailout funds from the government (paid in installments), renegotiating $1.3 billion in loans to mature in 2022, and selling bonds to raise money.7 At the end of the second quarter, Delta had enough cash and short-term investments to last through most of 2021 at the current burn rate.7 To help further decrease the current burn rate, Delta announced that it will commence mass lay-offs in October 2020.7 Prior to COVID, the steepest decline in air traffic was caused by the 9/11 terrorist attacks.8 It took approximately six years for airlines to recover the decreased capacity. Traveling by airplane may seem problematic right now, but we expect the demand to largely recover over time.

When we look at the above graphic and the story behind each of these companies, we at Laurel Wealth Planning see opportunity, even with difficulties and surprises along the way. Let us know your comments and questions.

References:

  1. Raymond James. Weekly Market Guide. Published August 6, 2020.
  2. Minneapolis/St. Paul Business Journal. 3M earnings, revenue fall more than expected in second quarter; loses court ruling. Published July 28, 2020.
  3. Business Wire. 3M Reports Second-Quarter 2020 Results. Published July 28, 2020.
  4. CNBC. GM swings to an $800 million loss as coronavirus shuttered factories and devastated sales in the second quarter. Published July 29, 2020.
  5. Associated Press. Plant closings send GM to 2Q loss, but signs of improvement. Published July 29, 2020.
  6. Federal Reserve Bank of St. Louis. Total Vehicle Sales. Updated Aug. 7, 2020.
  7. Wolf Street. Delta’s Passenger Revenue -94%. How it Plans to Stay Alive till “Demand Returns.” Confirms United’s Warning About Newly Waning Demand. Published July 14, 2020.
  8. Airline Passenger Experience Association. How the Airline Industry Survived SARS, 9/11, the Global Recession and More. Published June 9, 2020.

Definitions:

  • S&P 500: Representing approximately 80% of the investable U.S. equity market, the S&P 500 measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested.

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