Fritz Meyer Quarterly Economic Update, April 2020 (One Credit)

Fritz Meyer Quarterly Economic Update, April 2020 (One Credit)
Fritz Meyer
Tuesday, April 14, 2020 4PM EST
Program Id: 508889475
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Fritz Meyer Answers Advisor Questions, April 16, 2020
Federal Reserve announces extensive new measures to support the economy
April 14, 2020, free CE webinar for A4A members
Transcript of Fritz's Remarks, April 2, 2020
Host a webinar for clients with Fritz Meyer   
Coronavirus financial and tax alerts for business owners from Bob Keebler 


(April 16, 2020) After the live CPE webinar on April 14, Fritz Meyer answered questions from private wealth managers and financial planning professionals.  Below is a 20 minute video in which Fritz answers A4A member questions about the Coronavirus financial crisis of 2020.

The Fed is using new tools to fight the financial crisis that has resulted from the partial shutdown of the U.S. economy. A4A is grateful to Yardeni Research for its analysis on this topic.

Fritz says the Fed loan facilities should help avert defaults of below investment-grade bonds as well as AAA and higher rated bonds.        

About The April 14 CE Webinar Replay Amid The Coronavirus Crisis  

(April 14, 2020) With U.S. economic data uniformly awful and social distancing measures by states the key variable in determining the apex of the financial crisis, this quarterly webinar by Fritz Meyer is one-hour in length, rather than the usual two.

The newly-released WSJ consensus forecast of economists expect GDP to recede by -25% in Q2, followed by +6% growth in Q3, and +7% in Q4. If investors stick with this economic outlook then the S&P 500, up +25% from the bottom, may have seen its low. 

Of special interest at this pivotal moment in history is Fritz's analysis at this session of Wall Street's earnings forecasts, P/E ratios, and fixed-income yields.  IBES projections, Fritz says says, are overly optimistic.

This CFP® CE webinar examines forecasts from public health institutions, since the financial economics of the U.S. hinges on the course of the epidemic. Of course, Fritz plainly states the facts of the latest economic data from the government and independent sources. 

Fritz has averaged a 4.8 star-rating by A4A members -- a 9.6 on the new rating scale recently implemented for more precision -- he does have critics. During the longest bull market, Fritz was derided by as a "permabull," but those critics are proven wrong, as Fritz says Wall Street IBES earnings estimates are overly optimistic. Fritz's grim outlook is uncharacteristic, but shouldn't be overdone. It's an accurate appraisal of the disastrous numbers about to be released for the next three months. 

With U.S. financial economics hinging on the course of the epidemic, this webinar includes a review of forecasts from key public health institutions. The latest economic data and forecasts are reviewed, as well the latest earnings forecasts, P/E ratios, and fixed-income trends. 

Fritz was a portfolio manager in the mid-1990s at Invesco, one of the world's largest investment companies, before spending over a decade as Senior Investment Strategist. Fritz has advised advisors on A4A since March 2011. Fritz's monthly updates averaged a 4.9-star rating for the past year, and past performance is an indicator of future results: data-driven strategic long-term analysis for professional investors.


Fritz Meyer's market commentary for financial advisors, at a free extra session of Advisors4Advisors   

On April 2, 2020, Advisors4Advisors sponsored a 90-minute continuing education webinar for advisors about CARES Act provisions for small business owners with Bob Keebler, followed by a 30-minute session (no CE credit) in which Fritz Meyer updated advisors on the financial turmoil resulting from the COVID-19 pandemic. Following is a transcript of Fritz's commentary and the slides from the webinar. 

Fritz Meyer: I’m going to spend about 30 minutes talking about, first of all, the coronavirus. And then, all about the economic and market forecasts. I thought I’d start here today. And of course, I’m no expert in the virus. I think we all understand that, but I wanted to just kind of establish a timeline because I think what’s happened is pretty interesting. First of all, this chart appeared in The New York Times about two weeks ago, and it’s basically a schematic about when the virus number of cases would likely peak. And you can see in the yellow data series that, assuming some control measures, which is kind of the base case that I’m assuming we’re currently operating under, cases would peak in late June. OK?

Meyer: Now, if you look at this chart, however, and this is one of the single most important charts I can show you today, the timeline has changed. First of all, let me explain what you’re looking at. This was issued Monday of this week, and it’s, I think, the definitive research that’s currently being … I think it’s considered to be the definitive analysis, and it’s what Tony Fauci and the White House have been relying on in their presentation of the virus to all of us.

The source of the data is the Institute for Health Metrics and Evaluation at the University of Washington. That entity is being funded by the Bill and Melinda Gates Foundation in the state of Washington, so it’s a very high-quality study. And as I say, as far as I can tell, it’s the definitive go-to analysis at present. And the punch line that I wanted to get to is that if you look in the lower data series, deaths per day, the mortality peaks about 10 days from now. About 10 days from now.

If that’s the case, then I think probably we could be looking at going back to work. We Americans, we the U.S economy, could be looking at going back to work in May sometime. And that’s consistent with the president’s most recent statement. Remember, he said by Easter, and then he had to walk that back. And I think the reason he walked it back was this study.

Nonetheless, this is the current timeline that I think is at least the most authoritative, and I just wanted to bring it to your attention. You can see that I underlined “assuming that social distancing efforts will continue throughout the epidemic.” So, I think that the message will be, “Well, maybe you can go back to work, but we’re going to have to continue to do social distancing, if not we all wear masks.” That’s an increasing subject of debate.


Meyer: Another subject related to the coronavirus is, what about the weather? Here’s an article that appeared in The Wall Street Journal, referring to four independent research groups, in the United States, Australia, and China, talking about the fact that sweltering summer months might offer a lull in new cases. So, I think we do have that to look forward to. At least, my guess is that may mitigate the number of cases to some degree, and that would tie in to that peaking in April timeline. 



Meyer: And then, finally, this article that at least I view as being important. Probably no surprise to any of you on this call, but hydroxychloroquine in combination with Zithromax appears to be efficacious. And again, that’s the subject of a great debate, but this article is referring to the French study. Limited number of cases, of course, and more anecdotal than anything else. However, I think these results continue to be positive, so this is also something that perhaps will prove to be a positive in the fight against the virus. 

Meyer: Now, Bob just spent almost an hour talking about the CARES Act, so I’m not going to spend a lot of time talking about this. But I guess, more than anything, I just wanted you to know that this slide is in this deck of slides which you are all welcome to. And you can see the various key pieces of the CARES Act. But essentially, the idea here is to get the money added to M2, the money supply—cash, checking, savings, and money market accounts in the hands of households and businesses—so that they can spend the money.

And that actually is different than QE, quantitative easing’s mechanism. QE did not add to M2. This is truly helicopter money [laughs], which is a term that goes back to Ben Bernanke’s reign at the Fed. But this truly is an attempt to rain money down on us consumers, us spenders, encouraging us to go out and spend the money right away. The 1,200 dollars that many of us will receive is to be spent, and that will definitely add to the money supply, and hopefully help us avoid even worse effects from the coronavirus.






Meyer: In case you’re interested in the individual buckets of cash in the CARES package, again, here it is outlined. And the single biggest bucket, about 470 billion, is earmarked for the Federal Reserve, with which the Federal Reserve can actually apply leverage on a 1-to-10 ratio so that, to the extent the Treasury gives the Federal Reserve one dollar, the Federal Reserve can loan and make grants in the amount of 10 times that. So, that’s the idea here, to give the Federal Reserve leverage. Anyway, these are the various defined buckets of cash in the CARES Act.




Meyer: Here’s the stock market. And I’d just, I guess, just call to your attention the fact that at the bear market bottom, assuming that we’ve hit bottom—I can’t say that, but actually, my hunch is that we have, but, again, you’re not here to hear me speculate on whether we’ve seen the bottom or not—but at the bear market bottom on March 23rd, the market was down 33.9 percent from the February 19th peak, in a truly astounding decline the likes of which I bet none of us on this call have ever seen, both as to magnitude and the timeline here.




Meyer: And this chart I just thought I’d call your attention to once again, because it’s a chart that I’ve been using repeatedly in these webinars. The upshot of this one is, again, it’s truly astounding in magnitude. In the red data series, you’re looking at one-day moves in the S&P 500, and my point previously with this chart is just to highlight the fact that 3 to 4 percent moves in the stock market are enormous in magnitude and only, on average, come around about once a year. In 2016 and ’17, it was about 18 months, but about once a year you get an extraordinary one-day move. And usually those occur to the downside. Well, now look at a 12 percent one-day move, and many similar one-day moves since that 12 percent down day. It is truly extraordinary.

But again, the basic message in this chart is unchanged. And even though we’re all experiencing shock with respect to this bear market and how far down it’s gone, the message remains unchanged, which is the basic axiom of investing in common stocks is that the reason we’ve historically earned the equity risk premium, which is about a 6 percentage point premium in common stock returns over the long term compared to fixed income, is precisely because we’ve chosen to expose a portion of our portfolios to stock market volatility. This is a doozy, of course, but nonetheless, it goes with the territory. Now, I have no doubt in my mind that the market will recover from this, which I’ll talk about a little bit further in a second.


Meyer: Before I get to that, though, I also wanted to call your attention to this article that appeared in The Wall Street Journal on the 27th of March—that’s about a week ago—highlighting the third-highest-ever insider buying on record. Insiders meaning directors and officers of corporations. So now, shifting gears a little bit, talking about, well, have we seen the bottom? What kind of opportunity might there be in the stock market? The answer is, at least in the eyes of so many corporate officers and directors, is now’s the time to scoop up your company’s stock. And you can see how insider buying has surged. Again, I think most corporate people are saying this probably will prove to be a temporary phenomenon.


 Meyer: Before I get to that, though, I also wanted to call your attention to this article that appeared in The Wall Street Journal on the 27th of March—that’s about a week ago—highlighting the third-highest-ever insider buying on record. Insiders meaning directors and officers of corporations. So now, shifting gears a little bit, talking about, well, have we seen the bottom? What kind of opportunity might there be in the stock market? The answer is, at least in the eyes of so many corporate officers and directors, is now’s the time to scoop up your company’s stock. And you can see how insider buying has surged. Again, I think most corporate people are saying this probably will prove to be a temporary phenomenon.



Meyer: And this is the same chart established on a logarithmic scale, which, again, makes so clear how far from the norm we’ve now deviated. And it’s that norm that I think is so important to understand. That has 200 years of persistence, in statisticians’ terminology. A statistical series that has persistence is, I think, the important notion here. We will revert to the long-term trend rate of appreciation sometime.



 Meyer: This chart I think is so useful in periods like now, when people are actually panicking and really concerned about current events. You can see how many crises we’ve had. This one goes back to 1957, and yet the stock market, and of course the economy, has recovered from every one of those. And you can see where the coronavirus has taken us most recently, a deviation from the long-term trend.




Meyer: OK, this is one of the single most important charts I can pass along to you today. And it’s this notion. You’re looking at economic forecasts from JP Morgan and Goldman Sachs, and I’m just using theirs because they are two of the highest-profile sets of economists in Wall Street. And I think they’re also the most on top of the numbers. Interestingly, when I looked at the consensus GDP forecast, it’s lagging, so I didn’t want to present those numbers to you. But I think Goldman Sachs, for example, just released on March 31st. What is that? Three days ago. The Goldman Sachs is the most recent, dated March 31st, and you can see that they just pulled the plug on second-quarter GDP growth, saying it’s going to be negative 34 percent.

But here’s the key insight that I wanted to give you. But look at the consensus view as to the shape of this recession. It’s definitely a V-shape. Now, I don’t know if this is going to turn out to be the case. I really don’t. It’s very possible that the damage extends into the third quarter. But I just wanted to make the point that the smartest people among economists in Wall Street, private sector, believe at this point that it’s going to be V-shaped. You get extreme damage in the second quarter, but then, going back to my coronavirus timeline, which is why I started with that University of Washington timeline, well, if the virus peaks, if deaths peak, 10 days from now, then it very well could be that by July things are looking very different. People are going back to work, and so forth. And I think that would explain why, at least in Goldman Sachs’ and JP Morgan’s minds, we are set up for a V-shaped recovery. Just to finish off this slide, in the lower left, “If the U.S. follows the same path, the initial shock to the economy could begin to wane by May.” That was commentary from The Wall Street Journal.


Meyer: OK, so, how does the economic contraction affect earnings? Here’s the latest consensus forecast, and this is dated two days ago, or three days ago, March 30th. So, no earnings growth in 2020 versus 2019. And personally, I think it could be negative year-over-year, but let’s call it zero. But then, importantly, and this is the most fundamental point I can make with respect to the stock market today, increasingly, it would be my view that investors are completely writing off 2020, and it’s important to look into 2021.

And what’s so interesting about this chart is that this 2021 earnings estimate that you see here hasn’t changed at all in the last month. And again, what’s the source of this data? Well, it’s the legion of analysts in Wall Street that cover the 500 companies in the S&P 500. Analysts continue to maintain that the economy will right itself, business will revert to normalization in calendar 2021. And again, I’m not saying that’s going to be the case. I’m just saying that’s what they think is going to be the case. And that is the only way in which to value stocks at present. In other words, apply a P/E multiple to 2021 earnings—forget about 2020—and see where we are.

Meyer: Which is the purpose of this slide. In this slide, as you all recall, we’re looking at S&P 500 earnings versus the stock market. Stock market in black. Earnings, historic and forecast, in red. 2020 is a washout, a wipeout. No growth in 2020, and perhaps even negative. But increasingly, investors are saying, “Well, so what? Let’s look beyond. Let’s try to establish what the true underlying earnings power of the 500 companies in the S&P 500 is, and we will begin to establish a multiple on that number.” And so, what I’ve circled here is that fact that, at the low, on the 23rd, the stock market was trading at 12 times 2021 estimates.

Now, let’s compare that to the bear market bottoms in the fourth quarter of 2018, which was 14 and a half times earnings out 18 months. No, two years. Earnings out two years. So, it was 14 and a half times 2020 earnings at the bear market bottom in 2018. And the significant correction in the market before that, third quarter 2015, stocks were trading at 15.3 times earnings out a year and a half. So, in other words, the notion is we’re looking past a chasm. We’re looking over the Grand Canyon. We’re completely discounting earnings at the 2020 trough, and we’re saying, “OK, let’s now start putting a multiple on 2021 earnings and see where we are.”


Meyer: And so, if we look at this data a little bit differently, and apply this historic range of multiples between 16 and 19 times earnings, which I’ve maintained is normalized valuation, it’s best fit on the S&P 500, which you can see in this chart. By the way, you can see what a real upside aberration irrational exuberance gave us in the year 2000, how high above normal valuation the stock market became. Well, the other side of the coin is, look how far below normalized value the stock market was just recently, at the bear market bottom.

And this is updated through March 27th, but we’re approximately the same place today. We’re right on the bottom edge of, let’s call it, a normalized valuation channel. Again, suggesting to me that there’s pretty terrific value in stocks at these levels. The problem is everybody’s scared to death. Well, don’t be scared to death. Keep your conviction. And if you have any cash to invest, I would suggest that you deploy it into the stock market at these levels.


 Meyer: OK, let me shift gears and just talk about Fed policy for a second.


Meyer: This chart is very busy, obviously, but in red what I’ve done is to identify the six programs that the Fed released on March 23rd. In other words, the Fed has completely deviated, has adopted a startling new attitude with respect to propping up the U.S. economy. The Fed historically has been very conservative, not wanting to engage in fiscal stimulus, always telling us that, well, that’s the job of the federal government and legislators. The Fed has completely thrown away any caution in that regard. They announced six individual programs, which are identified in the red print. The acronyms are identified in the red print. So, to the extent you’re interested in what are these six programs, they’re here. But suffice to say that the Fed has truly hauled out the biggest possible guns, and there’s just no bottom to the monetary support that they’re willing to lend to economic stimulus. And they’ve made that clear. And I think they’ve even used terms—I think I just paraphrased the terms that they’re using—saying the funds are unlimited.



Meyer: Second to last topic I wanted to comment on is, OK, but what’s the cost? We all thought it was the case that the U.S. Treasury just can’t keep borrowing more and more money, laying on more deficits, laying out more debt. And just going back to the notion that I expressed in this chart a while ago, missing from the president’s State of the Union address was any mention of a looming threat: the growing national debt. So, this administration, the last administration, has really thrown any caution to the winds. Not even referring to the amount of debt or deficits in this crisis is taking it to a whole new level.

Meyer: The punch line, though, that I would suggest, is I am not worried that the United States runs off the rails, at least not for now, by just wantonly running up deficits and debt. And the reason for that is that the point I’ve consistently been making now for many years is that it seems to me that we here in the United States, with our economy, clearly have the ability and the means to finance all of this deficit spending. The problem is Washington doesn’t have the political will to stand up and say, “Well, we’ve got to close the deficit.” We just keep widening the deficit. But if the way to do that, closing the deficit, is to raise taxes, my point has been, well, we clearly have the wherewithal to do that, to close these deficits.

Back to the debt for a second, before this most recent $2.14 trillion addition to debt outstanding, the debt to GDP was forecast to do this. By the way, there are no updated charts available from the Congressional Budget Office yet, because this is so new. So, instead of 78 percent, after we spend another 2 trillion we would be, I think, at about 85 percent debt-to-GDP. So, the curve starts at a higher level.




Meyer: The last point I wanted to make is simply that, in this crisis in the stock market, I think it’s a perfect time to rebalance. Again, you heard me say earlier that I think you’re looking at pretty terrific opportunity in stocks. I think, by the end of the year, things will very likely look pretty different. At a minimum, then, if you’re operating your investment strategy based on modern portfolio theory, the three legs to that stool are diversify, optimize, and rebalance. Well, today’s spotlight would be on rebalance. So, to the extent the equity portion of the portfolio is way down, it might be a pretty opportune time to rebalance portfolios. No secret there, but I would just add my voice to the chorus of people saying, well, consider that, because I think you will not regret that decision to the extent you sell some fixed income and rebalance into equities at this point.

OK, Andy, that’s all I had today, and I really appreciate your inviting me on the call. Andy, if you’re speaking, you might be on mute.

Gluck: Yes. Thank you [laughs]. And I was brilliant for a second there. But thank you so much. We are way over time, of course, so we’re going to take questions. Fritz, we have a ton of questions for you, as well. So, you and I will work that out, and we’ll post the answers on A4A. You’re doing another session on April 14th. So, please join us for that, everybody. The only other thing I want to mention, again, is Bob and I are doing that 99 dollar ,15 minute, presentation that we’re going to put together on what Bob Keebler covered today.

Thank you, everybody, for joining us. We really appreciate it. This is by far the largest live webinar we’ve done, and we appreciate your showing up here and being part of what we’re trying to do. So, thank you for that. Fritz, thanks.









More than 50 hours of CFP® CE credit and more than 100 hours of Investments & Wealth Institute® credit on replays available 24/7 to paying members ($120 annually) of CPAs are eligible to receive CPE for attending live webinars only. To learn how to receive continuing professional education credit viewing webinar replays, please see our detailed instructions.

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