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Is Last Week’s Market Surge Sustainable? Don McArthur, CFA
April 15, 2020

Commerce Trust Company Senior Investment Strategist and Director of Equity Research Don McArthur, CFA®, manages the Fundamental S&P 500 Equity Strategy at Commerce Trust Company. Don is a regular contributor to many articles in the financial press and is a featured speaker at Commerce Trust client investment summits throughout the year in the Midwest. He recently covered some strategies on reducing overall portfolio risk, and now follows with his comments on a market that surged last week. Is it a sustainable trend? Are dividends safe? What do suspended stock buybacks mean for the future? Don shares his point of view on the equity market as we head into the “new normal” for earnings season.

WHAT DO YOU MAKE OF THE RALLY IN THE STOCK MARKET LAST WEEK?
The stock market had the strongest one-week movement since 1974 with the S&P 500 up 12.1%. Investors added risk as news improved regarding flattening of the virus curve and hope for therapeutic discoveries for the virus. Additionally, the Federal Reserve announced new programs that helped calm debt markets and the associated operational aspects of the financial system. This was enough to bring buyers into the market.

COMPANIES BEGIN REPORTING FIRST QUARTER 2020 EARNINGS THIS WEEK. WHAT DO YOU EXPECT TO HEAR?
Remember, first quarter earnings will only show a portion of the slowdown with many areas mandating shelter in place orders in the last couple of weeks of the period ended on March 31st. The key part of earnings reports is what companies will say about their outlook for business. There is a lot of uncertainty on what companies will be able to do financially in the coming months as much of the economy is purposely closed or restricted. Many companies have already withdrawn guidance for 2020 and we expect more to do so in the coming weeks.

WHAT ARE ANALYSTS FORECASTING FOR RESULTS AND FUTURE EXPECTATIONS?
With so much uncertainty, many analysts have not adjusted their earnings expectations since companies reported fourth quarter 2019 results in late January or early February. Clearly, the world has changed. We expect estimates to come down for the remainder of 2020, as well as 2021.

WITH THE RALLY IN THE MARKET, ARE INVESTORS INDICATING THEY KNOW CURRENT EXPECTATIONS ARE TOO HIGH?
I don’t think it’s a secret that after shutting down a large portion of the economy that forecasts are too high. However, markets typically don’t do well with negative revisions to estimates. Additionally, this unique situation adds to the uncertainty of what the future holds. Market volatility typically increases with uncertainty. To be sure, there will be companies that provide better than expected guidance and their stocks likely go higher. We tend to see this when expectations are lowered enough or too much.

ARE CURRENT DIVIDENDS SAFE?
Many companies have already cut dividends or suspended paying dividends. We see this in a few areas including Energy due to the lower price of oil and areas that are dramatically impacted by the coronavirus such as Travel and Leisure. Additionally, any area that wants support from government programs likely won’t pay a dividend. Clearly, the depth and duration of the economic impact from the virus are keys to a company’s ability to pay their dividends. We saw other companies suspend share buybacks, which seems prudent in this environment. We expect bankruptcies to increase, but likely more concentrated in the 31 million small and medium size businesses in the United States rather than in larger publicly traded firms.

THE MEDIA DISCUSSES A POTENTIAL PEAK IN THE NUMBER OF COVID-19 CASES IN THE NEAR-FUTURE AND WAYS TO GET THE ECONOMY MOVING AGAIN. WHAT WILL THIS LOOK LIKE?
We can’t be certain what the removal of “shelter in place” mandates will look like, but do not expect the economy to rapidly get back to where it was pre-COVID-19. This likely creates volatility in the coming quarters. While we look forward to the removal of isolation protocols, we see some type of social distancing being the norm for some time. It’s hard to imagine large gatherings of people until there is a vaccine for COVID-19 or we reach herd immunity. Recall, we also have millions of people unemployed and many businesses that won’t re-open. Additionally, supply chains are disrupted around the world. We will get a snap-back in some economic activity as people move around more and businesses re-open in the coming weeks, but we see it taking time to get to pre-COVID-19 levels.

ARE MARKETS PRICING IN THE BAD NEWS THAT YOU EXPECT TO COME?
Time will tell if the markets are pricing in all the bad news we expect to come out in the coming periods. Perhaps if they haven’t we could see a range-bound market or a re-testing of the prior lows – this is why we have been actively reducing risk in portfolios.

Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of April 14, 2020. This summary is intended to provide general information only, may be of value to the reader and audience, and is reflective of the opinions of Commerce Trust Company.

This material is not a recommendation of any particular security or investment strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk.

Commerce does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situation.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed, and is subject to change rapidly as additional information regarding global conditions may change.

Commerce Trust Company is a division of Commerce Bank.

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ABOUT THE AUTHOR

Don McArthur
Don McArthur, CFA® Senior Vice President, Director of Equity Research Commerce Trust Company
Don serves as a senior investment analyst with Commerce Trust Company in Kansas City and manages the Fundamental S&P 500 Equity Strategy. Don earned his accounting degree and business administration degree in economics from University of Kansas in 1995. He also earned his master in business administration degree from the University of Missouri-Kansas City in 2000 and holds the Chartered Financial Analyst® designation.
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