Oct. 30, 2020 - It was a scary week for stocks this week, from monster-cap to micro, they all got smashed.
There was no lightning bolt-like event that suddenly animated the selling, it was likely a combination of the market finally realizing that a new stimulus bill isn't happening any time soon, earnings reports not pointing to as robust a recovery as hoped, and some traders de-risking before the election.
EarningsThis was a big week for earnings in terms of both number of companies reporting and the size of those companies. FactSet reports 65% of the S&P 500 have published their quarterly reports as of Friday. Of those 86% earned more than expected, which tops the five-year average of 73% (companies beating earnings nearly three-quarters of the time almost makes it seem like either analysts or companies are gaming this somehow). That improvement over the average beat-rate isn't too surprising given that economic data recently has largely come in better than expected.
Of course, earnings are still expected to show a 2.1% decline, year-over-year, for the quarter. A year-over-year decline is also expected in the fourth quarter, before gains return in the first quarter of 2021, although that is against a comparable quarter that was also damaged by coronavirus-related measures.
Apple (AAPL) is far from a typical company, but a look at it's earnings report and the market's reaction seems worthwhile. The company beat the mean analyst estimate by $0.03, which was smaller than the $0.20 or more that it has exceeded estimates by in recent quarters (This is another case where this quarterly dance seems dumb--if the game is to be better-than-expected, how can Apple be not better enough?).
The company also sold fewer iPhones than expected, but given that it is launching a new model this month, is seems reasonable that many people who might have purchased a phone in September opted to wait for the iPhone 12. The company reported solid performance in non-iPhone categories, so even though it declined to provide guidance, which it didn't do last quarter either, it doesn't seem like the prospects for the company are particularly dim.
So why did the stock fall?
Apple's price-to-earnings ratio is above 35, compared to a five-year average of just under 16. This is what some analysts might call being "priced of perfection." Your company needs to be firing on all cylinders to justify a valuation like that, particularly when it is an established player with a nearly $2 trillion market cap.
Which brings us back to the broader market. The forward P/E ratio for the S&P 500 stands at around 20.5, which is above both the five and ten-year averages. Valuations are stretched on a lot of stocks, so if investors are starting to re-think their economic outlooks it makes sense to trim some stock positions.
What About That GDP Number?The big economic story this week was a record GDP print for the third quarter. The economy grew by an annualized rate of 33.1% from July 1 to Sept. 30. This is topped expectations for an increase of about 31%.
While this number is eye popping, it is important to consider it in context. First, it is an annualized rate, so to find out how much the economy actually grew in the third quarter, you should divide by 4. The resulting number is still impressive, but more realistic. But this still doesn't tell us the actual position of the economy compared to the very-recent past.
The third-quarter gain comes after annualized declines of 5% in the first quarter and 31.4% in the second quarter. This leaves the economy still about 3.5% below where it was at the end of 2019. For reference, from the pre-crisis peak to the trough, the Great Recession saw a 4% decline.
All told, The S&P 500 lost 5.64% this week, while the Nasdaq fell 5.51% and the Dow Jones gave back 6.47%.