April was an impressive month for equity markets. It’s hard to imagine just a month ago, we were still reeling from the sharpest market decline in modern Wall Street history. March was rough. In less than a month, about 1 million Americans lost their jobs* and the market had lost over a third of its value. Very little was known back then. We did not know how bad the covid-19 situation would be and how much of an impact it would have on businesses around the world. There was even less economic data to help us quantify what we were dealing with. But surely there was going to be more bad news to come. Market pundits started predicting what the recovery would look like. Would we see a slow recovery, shaped like a “U,” or more of a prolonged downturn, like the letter “L”?
Then suddenly in late March, the market started to turn around. Despite little good news coming from the CDC or the economy, markets around the world started turning around. And as we got more data about the massive layoffs rippling across the economy, the market rally started gaining even more steam. From the end of March through April the markets rallied a stunning 28%. The best month for the market in 30 years! How can that be? Let me put it another way. In a month where over 25 million Americans (one in six workers) lost their jobs, the S&P 500 had its best month in 30 years. Unbelievable. From the initial looks of the market, it looks like we are headed toward a “V” shaped recovery.
Adding fuel to the recent fire in the market has been the spat of earnings from corporate America. Earnings season has been underway for a bit now, but it shifted into high gear this week. Five of the largest companies in America reported their results this week. Much has been stated about these Big Five: Facebook, Amazon, Apple, Alphabet (formerly Google), and Microsoft. These names make up over 20% of the weighting in the S&P 500. It is a rare occurrence when such dominance is concentrated in a few names. The last time we saw that was back in 2000. It is also a rarer coincidence that all five would report in the same week. While they all sound like they come from the technology sector, the Big Five represent a nice cross section of the economy: two from the telecommunication sector (Alphabet and Facebook), one from consumer discretionary (Amazon) , and two from technology (Microsoft and Apple). Like it or not their importance cannot be underestimated. Their massive size gives them an outweighed impact on market cap weighted indices like the S&P 500.
So far, these companies have reported pretty good numbers and other S&P 500 constituents are following in their footsteps. Yes, earnings and revenues for Q1 were bad and Q2 will be worse. But some companies are reporting they see some light at the end of the tunnel. Of course, the future is hard to predict but things are improving, albeit slightly. That lack of pessimism (too soon to call it optimism), however, is having the opposite reaction in the markets. In the days since the Big Five reported pretty good results, the S&P 500 is down about 4%.
Nevertheless, this week’s reaction to the news is temporary. I am a news junkie like many of you out there. I have more news apps than games on my phone. Hopefully staying on top of the news gives me an edge. But investing based on today’s news is impossible. The market very rarely responds to today. It is looking into the future. It would be mind numbing to try to interpret today’s data to the market’s moves. That is why it is so difficult, damn near impossible, to ignore the noise of the news.
For us at Apriem we do our best to drown out the noise in the news. That includes ignoring the overly upbeat optimism and the downtrodden negativity. We are not here to predict what letter in the alphabet the economic recovery is going to look like. Our investment process is clear. For some strategies it is based on technicals. For others it is based on owning great companies for the long term. Not short-term plays from whatever is in the news. That is why Apriem continues to focus on investing in high quality U.S. based businesses with sustainable competitive advantages and cash flows that are trading at a discount to their underlying value. Our investment process to identify these names has not changed and we will continue to monitor the markets for future opportunities. As always, please let us know if you have any questions or concerns.
Sources: IrrelevantInvestor.com and Liz Ann Sonders, Schwab.