Gill Capital Partners May Day Update
Happy May Day! We hope everyone remains healthy, both mentally and physically, as we enter the month of May.
What is May Day? May Day is an often overlooked holiday with a long and varied history dating back thousands of years. The day has had many different events and meanings associated with it over the years, but most have centered around welcoming in the spring season. In many countries, May Day is celebrated with the traditional Mayday pole (Maypole), along with decorations and dancing. In the late 1800’s however, May Day took on a more serious meaning as “International Workers Day.” At the height of the Industrial Revolution, thousands of men, women and children were dying each year from poor working conditions and long hours. Labor Unions worked together and declared that, effective May 1, 1886, eight hours would constitute a legal day’s labor. Violent protests ensued in the years following the proclamation, but it marked one of the most important moments for the labor movement, both in this country and abroad. Today, we celebrate Labor Day as a way to honor the American labor movement. Labor Day was moved to September by President Grover Cleveland in 1894, intentionally severing ties with International Workers Day out of concern that it would build support for communism and other radical causes. We found it interesting to remember the roots of the modern-day labor movement at a time when global workforces are being asked to dramatically shift policies, expectations, and working environments. This pandemic is likely to have significant and long-lasting changes to where and how we all do our jobs.
Before we review what happened this week in the world of economics and finance, the weekly joke…
Funny/Interesting Quote/Joke of the Day
It’s called quarantine coffee. It’s just like normal coffee but it has a margarita in it, and also no coffee.
Corporate Earnings
We are roughly halfway through earnings season, and it is one of the strangest earnings seasons ever. Here are some of our takeaways from earnings announcements:
Global activity ground to a halt in February and March in sectors, like travel and energy, but was much more stable in others, such as online retail and grocery shopping.
Most companies are withdrawing their forward-looking revenue and profit guidance, as the current environment creates too much uncertainty to make forward-looking statements.
Analysts seem confused, if not clueless. The disparity between the high and low analyst price estimates has never been higher. In fact, it appears that many analysts have simply given up for now and are not revising their estimates.
Even though CEO’s are withdrawing future guidance, we are still able to find clues in their commentary. Below are a few interesting highlights we pulled out of earnings reports from a sampling of businesses in varying industries.
Ford – Ford lost roughly $2 billion during the first quarter and warned investors that losses during the second quarter will top $5 billion. Ford was one of the few businesses that did not withdraw its forward-looking guidance.
Merck – Merck says it expects a $2.1 billion hit to its full-year revenue on fears that sales will suffer as routine medical care is put off in the face of the coronavirus. Physician administered drugs account for roughly two-thirds of Merck’s pharmaceutical sales. Keeping patients out of doctors’ offices has dramatically reduced the demand for many of the drugs Merck makes.
Facebook – Facebook shares soared after the company announced its first quarter results showing revenue up nearly 18% from a year ago. Despite a steep decline in March ad revenue, Facebook stated that the first few weeks of April “began to show stability.”
Microsoft – Microsoft exceeded both sales and profit estimates in the first quarter and said, “the coronavirus had minimal net impact on the total company revenue in the quarter.” However, they also stated that “effects of COVID-19 may not be fully reflected in the financial results until future periods.”
The above is just a small sampling of earnings highlights, and the disparity among different sectors is clear. We find it difficult to remember a time when the difference in business performance and outlook among U.S. companies was so stark.
Weekly Market Update
Valuations - Equity valuations, as measured by the price to earnings ratio (P/E ratio), are becoming less attractive. In fact, the average P/E ratio of the S&P 500 now stands at its highest level (most expensive) in quite some time. Even though stock prices (the numerator) are significantly lower than they were just a couple of months ago, earnings (the denominator) have dropped dramatically as well.
GDP – According to numbers released on Wednesday, Gross Domestic Product (GDP) fell 4.8% in the first quarter. This was the first detailed glimpse into the deep damage the coronavirus has wreaked on the U.S. economy. Economists expected GDP to drop by roughly 3.5%. This marks the first negative GDP reading since the first quarter of 2014, and the lowest level since the 8.4% plunge in 2008. Economist are anticipating a much larger GDP contraction in the second quarter, as we will see the impact from a full quarter of the coronavirus interruption on businesses and consumers.
Over the last several weeks, markets have largely brushed off bad economic data. Investor sentiment appears to be buoyed by the anticipated re-opening of the economy, continued stabilization in virus cases, and hope that the scientific community is making progress with respect to a vaccine and/or treatments. Markets seem less optimistic heading into the weekend, however, and there is certainly some risk that markets have gotten ahead of themselves, pricing in an overly optimistic case. We are mindful of that as we make portfolio decisions.
Enjoy your weekend and your “coffee,” and take a couple of laps around the Maypole.
Gill Capital Partners Virtual Client Education Event
Gill Capital Partners will host a virtual Zoom Premier Event with a very special guest, Greg Valliere, Chief U.S. Policy Strategist at AGF Investments, on Wednesday, May 20th at 11:00 am (MDT). Greg will offer a non-partisan look at the upcoming presidential and congressional elections, how the coronavirus will impact the election, and how developments in Washington may affect investors.
Greg has followed Washington for investors for the past 40 years and specializes in coverage of economic issues, taxes, the Federal Reserve and – of course – politics. He has held numerous positions, including Director of Research at the Charles Schwab Washington Research Group. Greg is a frequent guest on CNN, Fox Business TV, Bloomberg radio and TV, and CBS Radio News. He is frequently quoted in the Wall Street Journal, Barrons, and the Washington Post. A graduate of George Washington University, Greg and his wife Mary live in the Watergate in downtown Washington.
Please mark your calendars for this insightful presentation! Invitation and details to follow.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.