In a record bear-to-bull turn, stocks ended on Thursday well off their lows on massive government aid, despite city shutdowns that have saved lives but slashed jobs. On Friday, stocks slid again after the U.S. took the lead in coronavirus cases. Investors are left wondering whether it’s time to buy, or too early, or too late.
The least-productive thing I hear smart people doing most days is arguing politics. Right now, it feels like a second pandemic. I’m hearing stock-market and public-health opinions that seem to spring from a starting point of loving or loathing the president.
I looked online at course listings for nearby medical colleges, and I didn’t find anything for partisan epidemiology. I’m assuming viruses, like stocks, aren’t especially impressed by party affiliation or hot takes on wedge issues. So here’s a plan that goes equally well with MAGA hats, Ridin’ With Biden pins, and Feel the Bern stickers.
If you’re a long-term investor, it’s a good time to put money in stocks. Something simple like an
S&P 500 index
fund is fine. It isn’t important to time the bottom perfectly. You just have to buy at prices that are reasonable compared with the alternatives, and hold for a long time.
The S&P 500 traded recently at 2630, which works out to 16 times last year’s earnings and 21 to 24 times some early estimates I’ve seen for this year’s depressed earnings. I don’t know if those are accurate, but so long as we expect earnings to return to prior levels over the next couple of years, prices are still reasonable, especially compared with a 10-year Treasury yield of 0.8%. Yields could remain low for years.
If you’re a short-term trader, good luck. I’ve seen estimates that say the market could plunge by more than a third and ones that say it could march right back to all-time highs. I have my own estimates as to the anatomical sources from which those price targets have been pulled. If I’m right, some analysts are risking grievous personal injury by trying to produce two targets simultaneously: a near-term bottom and a year-end bounce.
There’s good news for antsy investors: Diversification works. When the S&P 500 was down 30% for the year, a 60/40 mix of stocks and quality bonds had lost only about 20%. It had lost 10% versus its level in the same period a year earlier. That wasn’t a fun ride, but it wasn’t disastrous for investors with a decade or more to ride out the downturn.
Everything now depends on the course of the virus. I’m hopeful it will abate with warm weather; that shops and offices can open by late spring or early summer; that pills on hand for things like malaria and arthritis will prove effective remedies for Covid-19; that any fall recurrence will be much less severe; and that shoppers by then will feel confident enough to spend. But I’m prepared for disappointments on any of these things. You should be, too, no matter which lever you plan to pull come Election Day.
If you want to buy stocks, diversify. If you want to buy stocks patriotically, diversify while singing “The Star-Spangled Banner.” I like to start low so I can really let loose on “land of the free.”
I’m not much more impressed with Buy ratings than with index price targets. But ratings changes—when an analyst goes from Hold to Buy, for example—are more interesting. Academic evidence for their predictive power is iffy; a 2010 study found that investing based on ratings changes produced handsome returns, but a more recent working paper found that those returns have diminished. Upgrades aren’t all the same, however. I use them as an opportunity to examine the strength of each case.
An investor trying to do that in this volatile market had better be fast. There was a flurry of upgrades on Monday, March 23—hosannah! But after a few days of rapturous market gains, some calls were left looking outdated.
on Monday moved
(ticker: BA) to Buy from Neutral and said it was headed 82% higher, to $173. Bold call? Not bold enough. By Thursday, the stock closed at $180, making it the top S&P 500 gainer over those days.
(PEP) is benefiting from a surge in snacking at home. The report didn’t mention me by name, but when the firm raised its rating to Overweight, I took it personally. Pepsi shares rose 15% by Thursday’s close. They trade at 20 times earnings with a 3.3% dividend yield. Still attractive?
thinks so—it upgraded Pepsi to Outperform on Friday.
Airlines are key beneficiaries of a coronavirus bailout package, and two firms,
Bank of America
and Raymond James, upgraded
shares (LUV). They rose 29% through Thursday. The shares trade at 10 times last year’s earnings. This year’s earnings are a guess.
(NFLX) to Outperform, pointing out that it continues to take share from traditional television during our national work-from-home-athon. It climbed only 9%. Why? It has been a top gainer year to date. The worst-performing stocks during the week through Thursday included germ-fighting and stay-at-home names that were up nicely this year, like
(KR). Investors seem to view the shutdown as less of a long-term investment trend. That’s as bright a sign as any.
I spoke this past week with
(CVS) chief Larry Merlo. I’ve never appreciated grocery workers more than now, and the same goes for drugstore staff, so I was glad to see CVS roll out some front-line bonuses and extra benefits. Part of that conversation will be in episode two of my new podcast, called Barron’s Streetwise, after this column. Episode one, available now, is about the search for a Covid-19 treatment. Kindly subscribe for free through
Spotify, or other podcast platforms, have a listen, and leave a review.
About that: If I offended you on politics earlier, I take it all back. That was just for show, understand. Between us, I’ve always been a big fan of your party. That other one has gotten weird, amirite?
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