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Market commentary

  • 03062020_bull at a gate

    A bull at a gate…

    Roger Montgomery
    June 3, 2020

    While US consumer spending, the US economy’s fundamental driver, fell 13.6 per cent in April, and recorded the steepest decline since 1959, the data is now a month old. More recently, the US Institute for Supply Management’s (ISM) Manufacturing Index for May rose to 43.1 from an 11-year low of 41.5 in April, suggesting the economy is rising up off the matt after being KO’d.

    Optimism in the US about the relaxation of lockdown restrictions at both a State and business level, as well as hope for a coronavirus vaccine, has now seen the S&P 500 index rise 36 per cent from its March lows. Despite the unlikely event of a full recovery to pre-crisis levels of economic and business activity any time soon, the S&P500 has now cut its losses for the calendar year to just six per cent.

    The gains are despite S&P 500 earnings forecast to fall 20 per cent year-on-year over the next four quarters, according to analysts surveyed by Refinitiv. This represents a significant turnaround from the 10 per cent growth forecast before COVID-19 hit.

    Consequently, the S&P 500 now trades at 21.6 times expected earnings, putting its forward P/E into territory last seen during the dot-com bubble.

    That P/E ratio of course will fall as a consequence of an expected bounce in earnings in 2021 and 2022 but the losses being experienced today will reduce total earnings over the next decade. We have previously estimated the worst-case scenario for earnings would produce a decline in aggregate intrinsic value of about 12.5 per cent.

    The very high price to earnings ratios of both the ASX 300 and the US S&P500 also reflects the gains in the market capitalisations of businesses with high earnings power and healthy unleveraged balance sheets. It is towards these companies that most of the capital appears to be flowing. Indeed, to that point, it is worth noting that Barron’s recently reported that the Nasdaq’s ten largest stocks, which includes Facebook, Amazon, Apple, Netflix, Google, Intel, Nvidia, and Cisco have increased their market capitalisation by almost US$1 trillion.  This is triple the total gain of the remaining 2990 companies.

    The debate over current market valuations comes back to the definition of what a recovery is. If recovery is anything better than the economy being knocked flat on the boxing mat, then we are in recovery. If, however, ‘recovery’ is a return to full strength, we are some way off recovering.

    When the anticipated fall in earnings emerges it is possible that some volatility returns but equally, the idea of limitless fiscal and monetary policy stimulus, must be considered because unless there is a meaningful second wave of infections, the ‘re-opening’ data both here in Australia, and importantly, in the US, is also emerging and some of it is better and earlier than expected.

    We also know with certainty that this year the Trump Administration is going to record a fiscally-irresponsible deficit surpassing any previously established. Consequently, the US Federal Reserve will be forced to buy bonds protecting the world from a flooded bond market, rising yields and cratering asset prices.

    With an unwitting debate about defining recovery still underway, we expect a return of some volatility, and if it emerges it will deliver cheaper prices with the concurrent benefit of greater clarity about underlying business prospects. However we are also heavily invested in high quality business with bright prospects and leverage to an economic recovery.

    The Montgomery Global Funds and Montaka own shares in Alphabet  Facebook and Apple. This article was prepared 02 June with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.

    by Roger Montgomery Posted in Market commentary
    03062020_bull at a gate
  • 27052020_Market plunging to earth

    The market is a Kugel sphere, ready to plunge back to Earth

    Roger Montgomery
    May 27, 2020

    Have you ever seen a Kugel Fountain? It’s a water sculpture crowned by a large stone sphere held up by the pressure of the water rising beneath it. A bit like the situation we see today, with stock market being the sphere, supported by a steady flow of central bank money. And therein lies the problem: turn off the water and the sphere plunges to Earth. continue…

    by Roger Montgomery Posted in Market commentary
    27052020_Market plunging to earth
  • 26052020_recovery

    Why I don’t expect a V-shaped recovery

    Roger Montgomery
    May 26, 2020

    The massive dislocations caused by the coronavirus pandemic are having only a temporary impact on stock markets, which are pricing in a V-shaped income, earnings and economic recovery. But is this optimism warranted? Or will we continue to see businesses negatively impacted for some time to come? continue…

    by Roger Montgomery Posted in Market commentary
  • 25052020_Loans

    Baby got back

    Roger Montgomery
    May 25, 2020

    I recently discussed the fantasy world that some seem to be living in believing that a recovery will be easy and quick rather than slow and halting. We are in a recession and recessions rarely last six months, and finally, employment prospects in hospitality, retail and construction have deteriorated to such an extent that there will be fewer jobs for people to come back to when their jobseeker payments return to ‘normal’ and Jobkeeper payments cease later this year. continue…

    by Roger Montgomery Posted in Market commentary
  • 22052020_Fantasies

    Rainbows, Unicorns, V-Shaped recoveries and other fantasies

    Roger Montgomery
    May 22, 2020

    There are a bunch of reasons to expect this recovery to be longer and more painful than the market’s V-shaped expectations. Of course, within such an environment there will be businesses that do well, and we reckon we own a whole bunch of them in The Montgomery Fund and the Montgomery Small Companies Fund. continue…

    by Roger Montgomery Posted in Editor's Pick, Market commentary


    Forecasting a virus would be the pin that ultimately popped the bubble in asset markets – no one predicted that. The impacts of COVID-19 are being felt across almost every aspect of society. Our latest whitepaper covers navigating this correction to set up portfolios and wealth outcomes for the next decade.

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  • A glass jar full of Australian money

    Is the early release of superannuation a good idea?

    Andreas Lundberg
    May 20, 2020

    One of the actions announced by the government to stimulate the economy as a response to the current crisis is that individuals can apply for an early release of superannuation savings. The rules are that an individual can apply to withdraw $10,000 before the 30 June and another $10,000 between the beginning of July and the end of September. continue…

    by Andreas Lundberg Posted in Market commentary
    A glass jar full of Australian money
  • 14052020_habits

    Old Habits don’t die hard, they don’t die

    Roger Montgomery
    May 14, 2020

    During the depths of the market’s reaction to the Coronavirus outbreak I listened in on company and journalist conference calls and held multiple webinars and Microsoft Teams sessions with clients, planners and brokers.  Quite often I heard comments along the lines of, “this will change the way we live, work and travel forever”.  I am adamant in my belief that humans will revert right back to the way they have always done things, as soon as it safe (or permitted, whichever comes first) to do so. continue…

    by Roger Montgomery Posted in Editor's Pick, Market commentary
  • 12052020_counterfactuals

    When counterfactuals are hidden and histories alternative

    Andrew Macken
    May 12, 2020

    Australia’s ability to “flatten the curve” amidst this once-in-a-century pandemic appears extraordinary. Against numerous epidemiological forecasts of a healthcare calamity, including overflowing ICUs and thousands of deaths, it appears the spread of COVID-19 has been largely contained. continue…

    by Andrew Macken Posted in Market commentary
  • 07052020_Time to be optimistic?

    Is it time to switch to optimism?

    Roger Montgomery
    May 7, 2020

    After a few tough months, Australia is starting to come out of hibernation, and investors are looking ahead – as reflected in our rebounding sharemarket. But they’ll need to be selective in their stock selections, because some businesses will do far better than others in our post-lockdown world. continue…

    by Roger Montgomery Posted in Market commentary
    07052020_Time to be optimistic?
  • 07052020_Long term view

    Are you taking a longer-term view?

    David Buckland
    May 7, 2020

    Currently, the US S&P 500 stands at 2,870 points, down 15 per cent from its February 2020 peak.  (Meanwhile, the Australian All Ordinaries Index at 5,450 points is 25 per cent below its peak). On most fundamentals, markets have justified high valuations on the back of historically low interest rates. continue…

    by David Buckland Posted in Global markets, Market commentary
    07052020_Long term view