No Market Sector is Immune to COVID-19; Stock Market Rallies Anyway

Currently, all three US market indices are rallying amid the COVID-19 bear.

Investors seem optimistic about this year’s first-quarter corporate earnings, as if the anticipated results, along with Fed stimulus, might be enough to revive the market from its deflationary trend.

In the face of investor optimism, however, analyst forecasts paint a different picture.

Last December, analysts set their sights at 4.4% earnings growth for Q1 in the S&P 500, according to FactSet.

Since COVID-19, that figure has been revised downward to -10%, the largest year-over-year decline in more than a decade.

So, what kinds of unpleasant surprises might bullish investors face as companies begin reporting earnings--or rather negative earnings?

Banks and energy stocks are currently among the worst hit, and banks begin reporting first.

Among the benefits of holding stocks are dividend payments. Contrary to what many investors may think, dividends aren’t guaranteed.

When companies need to preserve cash, pressured under extraordinary circumstances...times like now...that’s when companies are most likely to slash or cancel dividend payments?

Any investor who remains optimistic amid everything that’s going on should listen to companies’ earnings conference calls.

Pay attention to the Chief Financial Officer presentation. Listen closely for guidance, especially from those who dare present any financial guidance at all.

Think about it: amid an unknown epidemic duration and an impact that can’t be comprehensively evaluated, at least enough to produce a reliable forecast, how can anyone provide optimistic guidance in the face of such negative uncertainties?

FactSet’s forecasts have been dismal--the path of least resistance it seems, and perhaps the most “certain” path to take.

But again, they’re not in the position of most CFOs who are trying to put a positive spin on gloomy probabilities.

CEOs and CFOs will likely spin bad news in a hopeful light. What you get is verbal assurance. What you don’t get is “truth.”

How many investors prefer a positive spin to truth? Lots of them, so it seems.

Analysts are already differing when it comes to earnings forecasts. Many on Wall Street are in direct contact with larger investors and company execs. As objective as they try to be, many are biased without even realizing it.

Against the “moderate” backdrop of analyst consensus, you get something like this (see below) from the International Monetary Fund (IMF) which jolts any sense of complacency (image from Bloomberg.com).

By IMF measurements, the current global economic forecast is the worst since the Great Depression.

Also, remember that St Louis Fed’s James Bullard also forecasted an unemployment rate of around -30%. That figure exceeds the Great Depression whose unemployment rate maxed out at -24.9%.

Despite the writing on the wall, as sobering as it may be, we have mainstream investors betting on the continuation of the bull run, and the smart money overweight or partially allocated in gold:

As Q1 2020 earnings season unfolds, toward which crowd might you find leaning?

Are you staking it all on that lucky hand, or are you diversifying or rebalancing your assets in a calculated manner to adjust to the “reality” of the circumstances, and all of the opportunities that it may present before you?

As you can see from the image above, the lines have been clearly drawn.

Those who feel they can outsmart the dismal data pouring in will likely line up with the media pundits who see sunshine on the horizon.

They may be right. But what matters most is how much can be lost or gained if they’re wrong, considering that there’s more evidence weighing against optimism rather than supporting it.

Right now, gold has tremendous upside as a growth asset and a hedge. The last few months have proven that to be the case.

As earnings season gets underway, the last you’ll want to do is get stuck with a losing hand and a wrong bet. Safety comes first. And that’s what physical gold is all about. Always has been, always will.