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With Markets Under Siege, It’s Time To Consider Serious Portfolio Adjustment

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With the stock market in an unprecedented period of volatility, we are all sometimes forced to make tough decisions. The recent turn of events around the potential impact of the coronavirus has unfolded with incredible speed, leaving many to wonder what could happen next, and no clear answer.

While global markets are today rising along with energy companies getting a boost from U.S. President Donald Trump’s suggestion he may intervene in the Saudi-Russian oil price war, the bigger picture remains murky and difficult to assess. Before yesterday’s uptick, the S&P 500 had plummeted 30% in just four weeks and it’s anyone guess what tomorrow may bring.

The increased uncertainty, rising levels of volatility, and potential for a slow economic recovery have resulted in the shifting of assets in my portfolio, reducing my equity holdings, and raising cash. With my fear that the economic outlook could grow even worse and the potential for the stock market to fall further, it seemed to be the right thing to do.

CBOE Volatility Index

CBOE Volatility Index

Global Risks

Global stock markets have so far failed to respond decisively to many of the actions that the central banks around the world have taken to try to calm nerves. Even with fiscal policy in many countries now on the table, the equity markets continue to fall.

It indicates a few points of concern, with one being that the future is very uncertain or that the policies governments and central banks are taking may not be enough to solve the potential fallout. The lack of convinced response from the equity markets seems to present the most significant concern.

Estimates May Be Too High

Additionally, it seems possible that the current environment could severely impact companies’ performances as governments try to slow the spread of the virus by closing borders, and in some cases shutting down. It could result in some companies seeing a whole quarter or two of reduced revenue and earnings, and that means that earnings estimates for the broader S&P 500 may be too high.

U.S. 10-Year Treasurys Price Chart

U.S. 10-Year Treasurys Price Chart

If it does turn out that earnings are too high, then the value for the S&P 500 is not as cheap as it looks. Currently, S&P Dow Jones estimates earnings in 2020 of $169.94 and for $191.05 for 2021. It gives the S&P 500 a PE ratio of about 14.2 and 12.6, based on the indexes level of 2,409.40 on March 19.

However, using a multiple that is closer to the historical average of roughly 16, the current level for the S&P 500 suggests earnings of approximately $151 per share in 2020, which would be a decline from 2019 earnings of $157.10.

It seems possible given the severity of the steps taken to thwart the coronavirus, the impact to 2020 earnings could be more significant than a 4% decline from last year.

S&P 500

S&P 500

Companies May Re-Emerge Different

Additionally, not all companies will emerge from this period, as brief or as long as it may be, the same as when they entered it. In some cases, it could mean a changed business model. Also, the market is likely to revalue specific sectors, meaning some stocks and sectors may not receive the same earnings or sales multiple they had before this event.

It leaves investors uncertain of what lies ahead and, at this point, unsure of what the potential impact to one’s stocks may be. For me, it resulted in a painful process of having to give up on some companies that I have held for multiple years because I simply do not know how they will emerge from this environment, nor how long it will take for the business to recover.

At this point, with equities influx, raising the cash portion of my holdings, while reducing some of the stocks that have more uncertain futures, seemed like the right thing to do. It does, in the end, create new opportunities down the road.

Disclaimer: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

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