Monthly Investing Update and Asset Allocation: John J. Blank, Ph.D. May/June 2020

Monthly Investing Update
and Asset Allocation

John J. Blank, Ph.D.
May/June 2020
IN THIS ISSUE:
Zacks May View On Equity Markets 2

U.s. Macro Outlook From San Fran Fed 6
Zacks Forecasts At A Glance 9
ZRS Chart Of The Month 34
Zacks Rank S&P500 Sector Picks 35
Zacks Rank May Industry Tables 36
May Sell-Side And Buy-Side Consensus 40
www.zackspcg.com | 1-800-701-9830
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STOCK MARKET OUTLOOK
1. Zacks May View on Equity Markets
U.S. Markets
Plagues have played a huge role in human affairs in centuries past.
Want my COVID19 U.S. Large Cap stock picking strategy?
First, focus on 4 top 2020 EPS sectors for short-term ideas:
On May 1st , stable EPS growth for full year 2020 came from a minority of S&P500 sectors. These are the obvious “Safe-at-Home”
sectors to play:
• Utilities (+2.4%),
• Info Tech (+2.2% y/y),
• Health Care (-0.5% y/y), and
• Consumer Staples (-0.5% y/y).
Second. When to see 2021? Longer term, I would focus on a rebound in beaten-down and China-led sectors: The stocks would
really come to life with a vaccine or treatment.
ZACKS INVESTMENT MANAGEMENT Page 2

• Energy (+109%),
• Industrials (+61),
• Consumer Discretionary (+59%),
• Financials (+33%),
• Materials (+25%),
• Comm Services (+21%),
• Info Tech (+15%),
• Health Care (+14%), and
• Consumer Staples (+7%).
There will be a time to play these deep cyclicals, based on a 2021 EPS
take-off. I am not sure when. This is the post COVID19 economic recovery
story. We will all watch it unfold, from different perspectives.
Third, after broad-brush study at the top-down level, I would go

into industry group mode. I would drill down into only obvious top
stocks in top industries.
Here are mine, force ranked. That means the best industries are at the
top of the list.
1. Semiconductors (where tickers INTC and NVDA are)

Semi equipment/wafer fab (where tickers AMAT and LRCX are)
Semiconductor equipment (where ticker COHR is)
Computer-Storage Devices (where ticker WDC is)
2. Computer-Software (where ticker INTU is)

Computer – Mini (where ticker AAPL is)
Computer-Services (where ticker CACI is)
Technology Services (where ticker WORK is)
3. Internet-Software (where ticker SQ is)

Internet-Services (where TCEHY or GOOGL or BIDU or AKAM is)
Internet-Software and Services (where ticker NTES is)
Internet-Commerce
4. Electronics-Miscellaneous
Computer-Optical Imaging (ticker MITK)
Fiber Optics (where ticker CIEN is)
5. Medical-Info Systems
Medical-Drugs (where ticker NVS is), Biomedical and Genetics (where
ticker NVAX is)
Medical-Instruments
Medical-Products (where ticker ABT or MDT is)
Instruments-Scientific
6. Retail-Convenience stores (7-11 types, LOW)

Foods-Natural (Whole Foods, part of AMZN)
Containers – Paper & Glass

7. Audio-Video Production
Online Gaming, (another example is Nepris in e-learning, no
ticker)
Toys, Hobbies, Games (where ticker EA is)
Cable TV (where ticker DISH, CMCSA is)
8. Internet-Delivery Services (where ticker GRUB is)

Retail-Mail Order
Satellite and Communications (where ticker SATS and IRDM
is)
9. Medical-Nursing Homes
Medical-HMOs (where ticker HCA is)
Medical – Outpatient and Home Healthcare
10. Financial-Consumer loans, small business, student loans

(where ticker NAVI is)
Financial-Mortgages & Related Services (refi)
Insurance Multi-line
Insurance-Accident & Health
In closing, keep the silver linings of this saga in mind.
• The whole U.S. economy is NOT shut down.

• Most people are at work today.
• The grocery stores are killing it.
• Many, many U.S. and global companies are tech-
based.
• China is improving first.
• The faster a state shut down, the faster a state gets to
reopening!
Stay optimistic!
Global Markets
There are a variety of facets to the world’s COVID19 battle scenes. Take them all in at the same time -- to see most clearly where CO-
VID19 matters stand.
(1) On May 1st , Cambridge, Massachusetts based biotech Moderna announced an agreement with Swiss drug maker Lonza
Group to manufacture up to a billion doses per year of mRNA-1273, Moderna’s vaccine candidate for the novel corona virus.
The two companies initially plan to establish manufacturing capabilities at Lonza’s facilities in the U.S. and Switzerland to make
the vaccine at both locations, with additional production suites to be established across Lonza’s worldwide facilities under a 10-
year agreement.
The companies expect to produce the first batches of mRNA-1273 at Lonza’s U.S. facility in July 2020.
A portion of the funding for the manufacturing operations in the U.S. will come from Moderna’s contract with Biomedical Advanced
Research and Development Authority (BARDA), part of the U.S. Department of Health and Human Services.

(2) Sir John Bell, the Regius Professor of Medicine at Oxford University, said on Sunday May 3rd that researchers at that major U.K.
university --who are working on a potential vaccine for the coronavirus-- would likely have an idea of its efficacy by June.
The Oxford researchers hope to generate enough data from Phase Two trials to get evidence that the vaccine has efficacy by the
beginning of June.
Bell called the chances of success in developing a vaccine “pretty good,” adding “we are gradually reeling it in, bit by bit and as
every day goes by, the likelihood of success goes up.”
(3) COVID-19 shutdowns are still in place, but many European countries are getting ready to test post-lockdown life.
• Italian factories and building sites reopen from Monday May 4th, after Europe’s longest lockdown.
• So will German schools, museums and churches, following the reopening of small shops.
• Britain will lay out its exit strategy in the first weeks of May.
Slowly does it seem to be the message coming from European governments wary of a renewed spike in infections.
But with the ECB predicting the euro area economy to shrink by as much as -15% in Q1, the authorities are also keen to get activity
going again. The authorities will watch April trade and industrial output data for clues on how Q2 might shape up.
The stricken country of Italy faces a sovereign bond rating review from Moody’s on Friday May 8th. At a notch above junk, the
rating is very likely safe. An unexpected downgrade from Fitch would jangle nerves.
(4) After two months of intensive social distancing, South Korea is about to open up too.
According to the Wall Street Journal, South Korea has a rule for everything.
When meeting in an office, people will wear masks. At meals, diners will sit next to each other or in a zigzag pattern, not directly
across. Hotel rooms will be ventilated for 15 minutes after travelers check out. Visitors at zoos and aquariums must stand 6 feet
apart. Shouting and hugging will be discouraged at sporting events. So will high-fives.

(5) In China, their enormous and globally-connected industrial sector probably comes back to life before the more domestic
services side.
China’s policymakers appear cautious about allowing service businesses such as movie theaters and gyms to reopen.
That means that there’s still some way to go before that country returns to a situation that’s close to “normal”.
(6) The operating capacity of Brazilian industry dropped to 57.5% in April, the lowest in a time series going back to January 2001.
While overall Brazilian industry is using just over half of its productive capacity, the impact varies among sectors.
• Car manufacturers have been hit the hardest, using only 12.5% of their overall capacity.
• Other areas, such as apparel and leather goods & shoes are down to 20.5% and 24.5%, respectively.
• On the other hand, paper & pulp manufacturing is the positive highlight, with 90% of its capacity in use.
On May 4th, the city of Sao Paulo (Brazil’s biggest metro area) began blocking major avenues, aiming at reducing the number of
people breaking social isolation.
(7) The Russian National Guard said it is using drones and a helicopter to enforce self-isolation rules in Moscow and the Moscow
region over that country’s May holidays.
The drones and helicopter will send information about violations to officers on the ground, who will then issue fines to violators.
(8) Despite grim virus statistics, India allowed most businesses and services to reopen on Monday May 4th, entering a third phase
in the national lockdown strategy. Indians were warned it was time to learn to “live with the virus.”
(9) Japan’s prime minister extended a state of emergency over the corona virus until the end of May. That government warned
it was too soon to lift restrictions.

2. U.S. Macro Outlook- San Francisco Fed “Fed Views”

Sylvain Leduc, EVP and director of research at the Fed of San
Francisco, stated his views on the current U.S. economy and the
outlook as of April 2nd, 2020.
The human toll from the coronavirus disease (COVID-19)

pandemic continues to rise around the world. As authorities
implement social distancing restrictions to mitigate the spread
of the coronavirus, the associated economic costs are becoming
more apparent. How the economy will fare over the next several
quarters remains highly uncertain, however. Much hinges on
how the virus spreads and evolves over time, as well as on the
effectiveness of social distancing and shelter-in-place measures.
This uncertainty necessarily clouds the economic outlook.
The uncertainty about the coronavirus is spreading through

financial markets as well. The Chicago Board Options
Exchange Volatility Index, or VIX, is frequently used as a measure
of uncertainty based on equity market volatility. This so-called
fear index measures investors’ perceptions of the 30-day-ahead
volatility of the S&P 500. The VIX shot up recently to a level even
higher than that experienced at the height of the 2008 financial
crisis. While the VIX has declined from its recent peak, it remains
elevated by historical standards.
This uncertainty has impeded the proper functioning of the

financial system. Using its emergency powers, the Federal
Reserve set up facilities to increase liquidity in several segments
of the financial system, including money market mutual funds,
the commercial paper market, and the corporate bonds markets,
among others. The Fed also resumed buying Treasury securities
and agency mortgage-backed securities and reduced the federal
funds rate to near zero.
Equity prices have fallen sharply since the end of February

and the market has remained very volatile. Still, the passage
of the Coronavirus Aid, Relief, and Economic Security (CARES)
Act has helped the stock market recoup some of its losses. The
$2 trillion relief package, at roughly 9% of GDP, includes several
measures targeted to alleviate the adverse economic impact on
households, businesses, and workers. This assistance should
provide some support to the economy in the months ahead.
Spreads on riskier assets, such as low-grade corporate

bonds, have remained high. Substantially higher borrowing
costs might pose challenges to highly indebted corporations.
Rollover risk is somewhat limited in the near term, as only 2%
of speculative-grade corporate bonds are expected to mature
during the second quarter. However, corporations currently in
need of funding are facing much direr financial conditions.
The current financial conditions are also extremely

challenging for small- and medium-size businesses,
particularly since roughly half of them only have enough cash
on hand to cover operating expenses for about one month,
according to a recent JPMorgan Chase Institute report.

Payroll reductions at small and medium-size businesses
could have a large impact on the labor market, as these
businesses account for 47% of total employment.
With social distancing measures and shelter-in-place

orders, firms have had to rapidly shed workers on an
extraordinary scale. Payrolls contracted by roughly 700,000
in March and the unemployment rate rose from 3.5% to
4.4%. However, this captures only part of the worsening of
labor market conditions, since the labor market surveys use
the middle of the month as a reference point to compile the
data. Thus, this snapshot for March occurs before most social
distancing measures were widely implemented. Indeed,
jobless claims surged to unprecedented levels in the last half
of March, with more than 10 million workers filing new claims.
Hence, the unemployment rate is likely to rise much more in
the following months.
Consumer confidence also fell in March, as economic

activity in several parts of the country stalled and the
economic outlook darkened. Consumer confidence is likely
to decline further in the months ahead as labor market
conditions worsen.
The pandemic is also adversely affecting manufacturing

activity around the world. While China’s purchasing
managers index (PMI) rebounded last month as the country’s
social distancing measures were eased, the PMIs in the
United States, Japan, and the euro area fell sharply.
The uncertainty around the evolution of the pandemic heavily clouds the outlook. As a result of the necessary social
distancing measures, the contraction in economic activity will be deep in the second quarter, accompanied by a steep rise in
unemployment. How the economy evolves thereafter will largely depend on the effectiveness of social distancing measures and
whether the virus weakens during the summertime or experiences a second burst in the fall. It will also depend on whether social
interactions quickly resume once the virus abates. Given the rareness of similar events for comparison, our understanding of these
issues is too imprecise to provide clear guidance about the evolution of the economy later this year and the next.
In the best scenario, the virus is sufficiently contained by the end of the second quarter that activity can quickly resume
in the second half of the year. The strength of the rebound will depend on the effectiveness of monetary policy accommodation
and the fiscal relief package in providing sufficient support to households and firms to avoid typical recessionary dynamics.
However, if the social measures last substantially longer, more firms may go out of business and more workers may
remain or become unemployed, reducing aggregate demand further and lengthening the downturn. The rebound in activity
would be more muted in this case, as relationships between workers, firms, and banks would need to be reestablished.
All told, the steep decline in economic activity suggests that inflation is likely to decline this year and remain substantially below
target in the near future.

3. Zacks Forecasts at a Glance
Top-Down S&P500 2020 Yearend Targets
To April 5th, the YTD S&P500 decline was -23.0%. To May 5th, that loss was -12.0%.
We have now reeled back in half of the virus losses. A stock market correction is a drop of -10% or greater. If prices drop -20% or
more, this gets called a bear market.
• Over March, the S&P500 fell -16.3% due entirely to virus shutdowns. Swift Fed action stabilized corporate bond markets.
• In early April, the Federal Fiscal CARES stimulus act passed. Since then, the U.S. Congress got a 2nd supplemental funding
bill passed, with more small business loans.
• In early May, international travel shutdowns remain the norm. Some U.S. state governors gingerly lift their “Stay-at-Home”
decrees.
Making a selloff feel worse, last Fall traders bought on a U.S. China trade truce. The S&P500 entered 2020 overvalued. 2019
returns? +28.9%. Total returns? +31.5%.
Typically, with risk-off selling, small caps plunge more. Their YTD returns were down -36.7% last month. The Russell 2000 index
was down -24.2% YTD in early May. It was nice to note improvement here. Shutdown orders really hurt small banks and firms.
On May 1st , 55% of S&P500 companies had reported Q1 earnings. For Q1-2020, the blended EPS decline for the S&P500 was
-13.7%. If that is the actual decline, it marks the largest y/y decline in earnings since Q3 2009 (-15.7%). All 11 sectors are down. It’s
hurt most by Energy (-472%), Consumer Discretionary (-79%) and Industrial (-62%) sectors.
Across April, analysts also lowered earnings estimates for S&P500 companies on Q2. The Q2 “bottoms-up” EPS estimate declined
by a hefty -28.4% (to $26.46 from $36.94).
The May 1st revenue growth rate for Q1 was a bare positive +0.7%. S&P500 revenue surprises reported by managers inside Info
Tech and Health Care sectors helped a bit.

However, the U.S. could see up to 3,000 deaths per day from the corona virus by June 1st , according to U.S. government documents
obtained by the NY Times. That means this. Don’t be surprised by a mostly sideways trading market and higher volatility.
2020 S&500 sector YTD returns to May 4th get sorted as follows: Energy $XLE: -38.1%, Financials $XLF: -29.1%, Industrials $XLI:
-24.5%, Materials $XLB: -16.9%, Real Estate $XLRE: -15.2%, Utilities $XLU: -13.0%, Cons. Staples $XLP: -8.7%, Comm. Services $XLC:
-7.2%, Cons Discretionary $XLY: -6.9%, Health Care $XLV: -4.2%, and Info Tech $XLK: -1.7%.
Notably, as sector returns above showed, oil and gasoline prices and suppliers have suffered disproportionally from
global virus shutdowns.
The WTI oil price benchmark went from $60 a barrel in January to below zero a barrel on April 20th. It has since rebounded to $25
a barrel on May 5th. A deep forward price contango has prompted traders to store oil bought today --for sale in 6 months or so.
The 10 largest oil producers and their share of total world oil production in 2019:
The 10 largest oil1 producers and share of total world oil production in 2019
Country Million barrels per day Share of world total
United States 19.51 19%
Saudi Arabia 11.81 12%
Russia 11.49 11%
Canada 5.50 5%
China 4.89 5%
Iraq 4.74 5%
United Arab Emirates 4.01 4%
Brazil 3.67 4%
Iran 3.19 3%
Kuwait 2.94 3%
Total top 10 71.76 71%
World total 100.63 Source: U.S. EIA
Consistent with events, May Zacks Industry Ranks showed top-down stock investors a “Stay-at-Home” sector order:
• Utilities, Health Care, and Consumer Staples led.

• Consumer Discretionary, Financials, Energy and Industrials were at the back
Once again, the globally exposed Info Tech sector held up. This growth sector has nearly managed to eke out stock market gains
this year.
Computer-Software sales are strong, as remote work became the norm. Semi chips kept in demand too, for a variety of tech
devices.
Epic declines in global manufacturing PMIs and the nasty WTI oil price drop already made a raging bear case for Energy,
Industrials, and Materials.
In early May, as shutdowns relaxed, oil traders began shifting quickly. They now bet on an oil price recovery past $25 a barrel.

What’s ‘Fair Value’ on the S&P500?
To reiterate, we need a virus shutdown approach.
First, focus on 4 top 2020 EPS sectors for short-term ideas:
On May 1st , stable EPS growth for full year 2020 came from a minority of
S&P500 sectors. These are the obvious “Safe-at-Home” sectors to play:
• Utilities (+2.4%),
• Info Tech (+2.2% y/y),
• Health Care (-0.5% y/y), and
• Consumer Staples (-0.5% y/y).
Second. When to see 2021? Longer term, I would focus on a rebound

in beaten-down and China-led sectors: The stocks would really come to
life with a vaccine or treatment.
• Energy (+109%),
• Industrials (+61),
• Consumer Discretionary (+59%),
• Financials (+33%),
• Materials (+25%),
• Comm Services (+21%),
• Info Tech (+15%),
• Health Care (+14%), and
• Consumer Staples (+7%).
There will be a time to play these deep cyclicals, based on a 2021 EPS
take-off. I am not sure when. This is the post COVID19 economic recovery
story. We will all watch it unfold, from different perspectives.
We are now watching a staggered opening of economies, both stateside

and abroad.
Carry on with substantial, regularly-spaced, equity market asset

allocations. This is an event-driven regime, and the Fed has share
buyer’s backs. Prices on respectable stocks are still better than six or
eight months ago.
When we set up “fair value” revenue and EPS growth estimates for the
S&P500 in early 2020, Zacks projected a +5.7% annual EPS growth rate.
Consensus “bottoms-up” revenue growth projections for 2020 now
show -2.9%. 2020 earnings are at -17.8%.
On May 1st , the S&P500 “Bottom’s Up” consensus shows a Q2 EPS

bottom coming.
Q4-19 $41.78
Q1-20 $32.96
Q2-20 $26.46
Q3-20 $34.37
Q4-20 $38.38
Q1-21 $38.36
Q2-21 $40.45

Zacks “fair value” earnings call for 2020 is based on a weighted 2H-2020 and 1H- 2021 forward look.
Zacks thinks 3,160 on the S&P500 by the end of 2020 is a fair target.
Back in January, very bullish top-down Wall Street strategists called for the S&P500 to end 2020 trading at 3,450. The “bottoms-up
call is for the S&P500 to finish at 3,440.
To actively compute “fair value” valuations, factor in earnings growth ahead, like the stock market does, 6 to 12 months.
“Bottoms-up” analyst earnings sum to $163.02 in 2019 at the moment. They expect to see $133.83 across 2020 and $168.29 in 2021
A 12-month look ahead at the moment? That means use 7 months in 2020 and 5 months of 2021 = $148.19.
The S&P500 trades around 2,800 on May 5th. Divide this by $148.19 = 18.9. That’s one factcheck on current S&P500 valuation. This
S&P500 forward 12m P/E (18.9) is well above the 5-yr average (16.7) and the 10-yr average (15.0).
Recall Zacks $168.54 number for 2020 S&P500 EPS made early this year? It is no longer valid. I would use the $150 consensus
mark I computed above, as a blend.
On stocks in May 2020. Stick with your allocations. The VIX volatility index is showing you stocks will be 2x as volatile as last year.
This is when you make good long-term purchases, on lower share index prices. Just realize. The VIX can pop higher again, and
again. When it has spiked to a high, and is then declining, this is usually a good entry point.
In closing: Global bond buying support in 2020 and 2021 and the U.S. Federal CARES stimulus (and their analogues across the
globe) are the driving bull market factors.
We will see the U.S. Fed, the People’s Bank of China (PBoC), the Bank of Japan (BoJ) & Europe’s ECB coordinate and buy all types
of debt in 2020 and 2021 and beyond.
Money printing can drive stock prices, well beyond any projections for EPS growth.
Setting U.S. returns expectations for 2020…

In Q2-20, I don’t see stock markets any clearer than anybody else. As more shutdowns are lifted and restrictions are not as
onerous, what happens to S&P500 returns in 2H-20 can still look like annual stock market runs in year’s past. But Mr. Market
rules, not me.
Look back --at the multiple years’ sequence of S&P500 returns in the recent bull market cycle.
• 2017 S&P500 returns were +22.6%.
• In 2016, it rose +12%.

• In 2015, it rose a paltry +1.4%.
• In 2014, it rose +14%.
• In 2013, the best year of this cycle came in at +32%.

However, the marks for the coming earnings season are going to be poor, across the board. I see 1 S&P500 sector (Utilities at
+4.0%) with a positive Q2 EPS growth mark as we cross May. Reflecting deep shutdowns, just two sectors Q2 revenue outlooks
(Utilities at +2.4% and Health Care at +2.2%) show S&P500 positive revenue growth.
It is not going to be Q2 earnings and revenues that will propel stocks. Traders are looking much further ahead, like they always do.
It is Fed liquidity, and the CARES act. The end of shutdowns. And a vaccine.
What Produces 2020 Optimism?
First and foremost. Bulls celebrate a very possible miraculous improvement in testing, treatment and a cure for the novel virus.
Second, expert-led Public Health shutdowns get lifted properly.
Now a close third, we have a very dovish Fed. After that, we have dovish central banks actions outside the USA. Fourth, we have
U.S. CARES fiscal and financial packages.
Fifth, 2021 has a positive look with better earnings and revenue growth fundamentals. On May 1st , the latest estimates show 2021
offers us S&P500 earnings growth of +25.1% and revenue growth of +7.9%.
Sixth, broad large cap and small cap valuations have dialed back to respectable levels.
In hindsight, look at the last 2 years.
• In 2018, the S&P500’s +20% earnings growth and +9% revenue growth were a struggle for risk takers. They spooked
about overheating and the U.S. China trade war.

• In 2019, shares were pumped up by Fed rate cuts and Fed repo buying.
Momentum stock buying, also in hindsight, didn’t help investors who stayed the course. Now,
cheaper share price valuations offer a means to nice returns in invested portfolios.
Seventh, recognize: Entering this crisis, U.S. corporates did maintain stronger revenue growth
and higher profit margins vis-à-vis the rest of the advanced world. Tax cut funded stock
buybacks supported EPS, heedless of U.S. or global fundamentals.
Finally, there are U.S. sector fundamentals that benefit from ongoing secular catalysts --
• Aging demographics builds Medical Care demand. Ditto health-exchange growth.

• Business equipment & structures investment can come off the shelves. We didn’t see
any rise in U.S. capital expenditures. CEOs are in a decent place there.
• Semiconductor IoT (Internet of Things) developments still hold attractive secular impli-
cations. Chip stocks had a bull run in 2019 – based mostly on those hopes.
• A remote working world is only going to accelerate demand for chips, certain soft-
ware, and cloud-based, or in-situ, computer storage support.
What to make of poor (-13.7%) U.S. earnings growth in Q1-20 and beyond?
The forward 12-month P/E rests at 18.7. That P/E metric is worse than the 5-year average at 16.7
and the 10-year average at 15.0.
Given the poor U.S. share index valuation story, there is no big surprise to the buying. Traders
see a rosier cast of coming annual earnings growth rates than analysts.
Many analysts may be too pessimistic. In a Wall Street career, it works to be cautious.
What’s Alive for 2020 Pessimists?
This earnings blowout drags on and on, and deepens -- that’s the immediate bear case.
• For Q2 2020, bottoms-up analysts see S&P500 earnings growth of -36.7% and rev-
enue growth of -9.5%.
• For annual 2020, analysts moved S&P500 earnings growth to a -17.8% and revenue
growth to -2.9%.
Worries can dramatically increase about financial losses reeling out of corporate America, into
the banks, then beating up share and bond markets. A rise in fears (founded and unfounded)
can lead to an even deeper U.S. share pullback.
Both High Yield and Investment grade credit would blow out without the Fed backstop. Oil
producers and suppliers may be in big trouble.
Other big risks lie hidden, inside the rosy 2017 to 2019 corporate and real estate lending
environment, without being widely appreciated.
Too much cheap money for too long. Years and years of it.
Is it time to buy U.S. stocks in early May?
Be brave. Get in there. The market will be volatile as the shutdowns ebb and flow.
Zacks strategists (including me) stay bullish. The S&P500 can make it to 3,160 at yearend
2020. I am not averse to setting that number higher, later, either.
Over the last 2 years, markets HAD to climb two walls of related worry: trade wars and recessions. Now, they must look past a sud-
den, shocking Public Health driven suppression to some type of Public Health recovery (small V, large V, or L, or U)
• Bulls rosily envision 2H-20 and 2021 U.S. and global EPS snapbacks. Q1-20 S&P500 EPS is at -13.7% as I write. Q4-19 EPS
was -0.3%. Q3-19 was -2.1%. Q2-19 was -0.1%. Q1-19 was -0.3%. But look further back. Q4-18 earnings marked +13.3%, a
fifth double-digit quarter in a row. Q3-18 was +26.1%. Q2-18 was +25.0%. Q1-18 was +24.7%. Q4-17 was +15.2%.
Don’t fight the Fed. Added to that, don’t fight the ECB in Europe, the BoE in the U.K., the BoJ in Japan, and the People’s
Bank of China. All major central bank players brought out the “anything goes” monetary artillery. Already in 2020, with
their internal virus shutdown underway, Chinese authorities ramped up monetary support. Playing catch-up, U.S. and
non-U.S. money authorities surely stay uber-accommodative and creative in 2021 and beyond.
The big bull case is now for vastly improved testing, treatment, and a cure for the novel virus. The medical world is on it.
• Bears (another -10% to -30% downside from here) see spreading deep growth negatives across U.S. and international
markets in 2H-20 and 2021. This is due to widespread (more global) shut downs and a permanent swath of service firm
bankruptcies and massive job losses from the coronavirus.
The hoped-for recovery is long and hard. The medical/hospital world gets overwhelmed by cases for months.
A 2nd or 3rd wave can happen. Good science takes time.
• Range-bound sages will mostly note broad and deep bond market sedation. “TINA”. And lots of share bargains. Domesti-
cally, the 10-year U.S. Treasury rate is incredibly low at 0.6%. U.S. consumer inflation will surely stay under the Fed’s statu-
tory target. The major stock market region, the U.S., had stable +3.0% or so annual wage growth, entering the crisis.
The U.S. CARES act is generous to both afflicted firms and the newly unemployed. Ditto a number of European packages,
Japan, and South Korea.
The positives: U.S. corporate balance sheets aren’t extended like 2008. Obamacare enrollment supports more corona virus victims.
Just a month ago, the U.S. 3.6% unemployment rate was near a 50-year low.
That record low household unemployment rate --seen for a year or so-- should have given consumers a helping hand. Consumer
interest rates stay incredibly low, in particular, home mortgage rates. Presciently, before entering the recession, the U.S. economy
had already market stagnant levels of capital investment.
The negatives: A U.S. and global recession can last a year or more. Trump will surely be more volatile and unpredictable, as the
election approaches. U.S. federal deficits were already above $1 trillion a year before the virus crisis. This will explode with another
$3T in spending support and financial market stabilization. U.S. consumers may not be locked down across the board. Regardless.
They are fearful to go out and spend.
EPS numbers in Q2, Q3, and Q4 can plunge and 1H-2021 –even more than is pessimistically forecast. This would make the current
2H-2020 and 2021 optimism look silly.
What of U.S. GDP Growth?
The Atlanta Fed Nowcast for Q2-20 computed -16.6% GDP growth recorded on May 1st. Q1-20 was -4.8%. Q4-19 was +2.1%. Q3 was
+2.1%. Q2 was +2.0%. Q1 was +3.1%.
I used to write this note: +1.0% in GDP growth over a year is when recession fear selling triggers. That is indeed what happened in
2020, and in record time.

• 2021 annual GDP growth sits at +3.9%. But there may be more snapback.
• 2020 annual GDP growth consensus is at -4.0%; Using April Consensus Economics data.
• 2019 annual GPD growth consensus was +2.3%.
• 2018 annual GDP growth finished at +2.9%.
• 2017 annual GDP growth was at +2.2%; notably stronger than 2016 at +1.6%.
For 2020, Zacks call is for -6.5% GDP growth; in line with the U.S. Conference Board economists. Prior to shutdowns, we modelled
a trend +2.1% to +2.3% U.S real GDP growth rate.
Negative U.S. earnings and GDP growth rates in 2020 speak loudly. But don’t overdo it. A 2021 earnings and GDP growth
snapback should be factored in.
• 2021 shows estimates for +25.1% annual earnings growth. 2020 shows -17.8%.
• 2019 delivered flat +0.6% annual growth. Q4 finished at +0.9%. Q3 was -2.2%. Q2 was -0.4%. Q1 was -4.6%.
• 2018 marked EPS ‘2-handles’. Q4 +13.3%. Q3 +25.9%. Q2 +25.0%. Q1 +24.6%.
Realize. This U.S. administration embellishes macro and stock market facts. There should be trader concern, on the spread of the
corona virus, deeper effects from U.S. tariffs, an aggressive Iranian military response, $3T annual federal fiscal deficit spending,
presidential credibility, and a lack of bipartisan policy thought.
Job Market
To sum job market matters up for you: On May 8th we learned that U.S. nonfarm payroll employment fell by 20.5 million in April
compared with a drop of -870K in March.
In April, employment in leisure and hospitality plummeted by 7.7 million, or -47%.

• 3/4th decrease was in food services and drinking places (-5.5 million).
• Employment also fell in arts, entertainment, and recreation (-1.3 million), and
• In the accommodation industry (-839,000).
This is the highest rate and the largest over-the-month increase in the history of the series (seasonally adjusted data are available
back to January 1948).
The number of unemployed persons rose by +15.9 million to 23.1 million in April.
So, basically ½ of the new job losses were in the restaurants, bars, entertainment, and accommodation space. That sounds about
right to me.
What should you think about ‘unbelievable’ job loss data?
Don’t waste time on broad-brush details. Do look closely into internal details. Like the Leisure & Hospitality job loss blowout, the
airlines story, and Health Care sector spending dynamics, leading to hiring etc. Read ISM Industrial sector comments next.
We all knew the big jobs blowout was coming. Stock markets knew it was coming too. There is only ‘new’ news inside these types
of reports, not in headline job loss data.
We knew last month. The U.S. household unemployment rate would be at least 15.8%.
Entering April, the S&P500 market index held up at 2,500 on the idea that something like 2/3 of stricken folks go back to their jobs
in 2.5 months or so.
The U.S. COVID hospitalization data is not as frightening anymore. All stock indexes have rallied on that news. 2,900 nearly stuck
on the S&P500. In this context, the bullish share traders are using different data. And they are likely going to be right.
Update on the U.S. fiscal stimulus program: the CARES Act
Here are the major components to know about (numbers from March 26th NPR article).
A. Help for Small Businesses: Specifically, forgivable loans for two and a half months of payroll expenses, wages plus benefits
would be the maximum loan size under this program. that whole program is worth around $350 billion. There is also progress on
another $200 billion in a 2nd bill.
Requires that recipients of loans do not buy back stock during the time the loan is outstanding, and that executives or employees
who made more than $425,000 in 2019 do not get a raise for the next two years
B. The thing that’s new related to business lending, the airlines, air cargo and aerospace specifically would be getting $75 billion
across the three of them, so it’s $50 billion for airlines, $8B for air cargo, $17B for aerospace in loans and loan guarantees through
the Treasury, potentially with Fed involvement, and in return for that, they would have to follow a number of rules around employ-
ee retention and so on.
C. $500 billion that will be given to the Economic Stabilization Fund. That would presumably be levered up by the Fed. They would
be providing these credit facilities for primary corporate credit and then also secondary market corporate credit,
D. Tax relief for individuals. Cash payments of up to $1,200 for individuals, $2,400 for married couples and $500 per child,
reduced if an individual makes more than $75,000 or a couple makes more than $150,000. Estimated to total $300 billion.
E. Then, the other piece is unemployment compensation, and so there the bill would essentially add to the amount that every
unemployed worker gets every week.
So instead of getting half their wages roughly, which is the standard benefit, they would be getting half their wages plus another
$600 per week, for up to 4 months. The $260 billion estimated cost is subject to change, based on the number of people filing for
unemployment t.

F. The bill does have additional

resources to the healthcare sector
essentially for hospitals dealing with all
of this. $150 billion in health-care relief.
• $100 billion in aid for hospitals

responding to the virus out-
break.
• $1.3 billion for community

health centers providing health
services for 28 million.
• $20 billion for U.S. military vet-

eran’s health care.
• $16 billion for Strategic National

Stockpile to increase availability
of equipment, including ventila-
tors and masks.
• $4.3 billion for the Centers for

Disease Control and Prevention.
• $11 billion for diagnostics, treat-

ments, and vaccines. Aka Drug Access.
G. In general, across countries, we have seen 10% of GDP responses. +5% of direct spending pulses. +5% into stabilizing financial
markets. This U.S. package is typical.
The latest United States ISM manufacturing PMI
The Institute for Supply Management (ISM) told us the USA April PMI registered 41.5%, down -7.6% percentage points from the
March reading of 49.1%. 50 denotes expansion.
Comments from the panel were strongly negative (three negative comments for every one positive comment) regarding the near-
term outlook, with sentiment clearly impacted by the coronavirus (COVID-19) pandemic and continuing energy market recession.
The PMI indicates a level of manufacturing-sector contraction not seen since April 2009, with a strongly negative trajectory.
Demand contracted heavily, with the (1) New Orders Index contracting at a very strong level, again pushed by new export order
contraction, (2) Customers’ Inventories Index approaching a level that is considered a negative for future production, and (3)
Backlog of Orders Index strongly contracting, in spite of a lack of production during the period.
Consumption (measured by the Production and Employment indexes) contributed negatively (a combined 36.5-percentage point
decrease) to the PMI® calculation, with activity dramatically contracting due to plant closures and lack of demand.
Inputs — expressed as supplier deliveries, inventories and imports — strengthened again due to supplier delivery issues that
were partially offset by continuing imports sluggishness. The delivery issues were the result of disruptions in domestic and global
supply chains, driven primarily by supplier plant shutdowns. Inventory contraction slowed due to throughput issues. Inputs
contributed positively (a combined 13.8-percentage point increase) to the PMI calculation. (The Supplier Deliveries and Inventories
indexes directly factor into the PMI®; the Imports Index does not.) Prices continued to contract (and at a faster rate in April),
supporting a negative outlook.
“The coronavirus pandemic and global energy market weakness continue to impact all manufacturing sectors for the second
straight month. Among the six big industry sectors, Food, Beverage & Tobacco Products remains the strongest. Transportation

Equipment and Fabricated Metal Products are the weakest of the big six sectors,” says ISM CEO Tim Fiore.
What ISM respondents were saying

“Thirty-percent decrease for April due to COVID-19 impact on both customers and suppliers.” (Computer & Electronic Products)
“Production stopped, other than to make hand sanitizer for those in need.” (Chemical Products)
“COVID-19 has created a wave of activities, including vendors closing, vendors focusing only on the medical industry, employees
not coming to work, delayed shipments from overseas, [and] etcetera.” (Transportation Equipment)
“The food processing B2B space remains steady. We are weathering the storm. There is a fortunate increased need for packaged
foods. Softening is showing through in some products that find their way into food service and lodging.” (Food, Beverage & To-
bacco Products)
“Our refinery is losing money making gasoline due to the falling demand.” (Petroleum & Coal Products)
“We supply the construction industry in various ways, where the slowdown has been a bit slower than most industries. It is, how-
ever; beginning to impact our business, and we see more challenges on the horizon.” (Fabricated Metal Products)
“The company I work for manufactures personal protective equipment [PPE], specifically N95 masks, face shields, as well as sell-
ing protective clothing and hand protection. In the area of PPE, our backlog has spiked to numbers we have never seen. While
no doubt some of the backorders will be canceled, many of the orders are longer term commitments from [the] U.S. government.”
(Apparel, Leather & Allied Products)
“Our packaging business is starting to see signs of a slowdown in May after two strong months into COVID-19.” (Paper Products)
“COVID-19 has destroyed our market and our company. Without a full recovery very soon, and some assistance, I fear for our abil-
ity to continue operations.” (Nonmetallic Mineral Products)
“Dealing with the effects of coronavirus and having 65 percent of our operations down.” (Furniture & Related Products)
Of 18 manufacturing industries, 2 reported growth in April.
International: COVID19 suppression hammers non–U.S. growth.
Investors should keep a close watch on the health of China’s economy. To do this:
• The Markit/Caixin PMI survey uses a mix of small- and medium-sized firms.
• The official China PMI survey polls big businesses and state-owned enterprise.
The Caixin China General Manufacturing PMI rose from a record low of 40.3 in February to 50.1 in March, to signal a broad
stabilization of business conditions. It has receded to 49.4 in April.
Look back. It’s consistent with pre-virus mainland China PMI manufacturing readings. Just before a “Phase One” trade truce on Jan.
15th, the Markit/Caixin Purchasing Managers’ Index (PMI) for Chinese manufacturing came in at 51.5 in Dec 2019.
Across 2020, China stimulus measures provide stock support, globally.

Entering the calendar New Year, the People’s Bank of China (PBoC) had cut a reserve requirement ratio for commercial lenders by
50 basis points, to release about Rmb 800 billion ($114.9 billion) of fresh liquidity into the banking system.
This was done ahead of Chinese New Year, later in January. The Wuhan virus shutdown happened on January 23rd.
On Friday April 4 th, the People’s Bank of China said it was cutting the amount of cash small banks must hold as reserves,
releasing around 400 billion yuan ($56.38 billion) in liquidity to shore up the economy hurt by the coronavirus crisis.
Given the PBoC monetary steps announced, Asian region stock markets should hold up. Ongoing gradual implementation of

mainland China fiscal and monetary support should continue to be offered, across the rest of 2020.
According to Consensus Economics in April 2020, mainland China’s GDP growth was +6.1% in 2019. Their London consensus
projects it to hit a lower +2.0% in 2020 and then bounce back to +7.8% in 2021.
What of Europe?
In early May, signs have flashed that the virus may be suppressed. Italy and Spain shutdowns are beginning. Germany has already
opened its small retail shops. U.K. virus counts were starting to flatten. Last month, the U.K. prime minister checked out of the
hospital. The U.K. Labor Party elected a new leader.
The European Central Bank actively supports loan & bond markets, with multiple doses of financial support. A number of EU
stimulus packages have been pushed ahead.
For the EU Cumulative fiscal stimulus, 19 countries announced virus measures that amount to 1.0% of the bloc’s GDP; this includes
€65bn to invest in and support small and medium sized enterprises (SMEs) and health-care systems across the bloc; they
further set aside €8bn-€20bn to lend to companies; and created another investment program of 10 billion euros also to support
businesses.
Referring to calls for the ECB to go further and cut interest rates to ease borrowing costs for highly indebted eurozone countries,
Lagarde said on March 12th: “We are not here to close [bond] spreads, there are other tools and other actors to deal with these
issues.” That didn’t go over well.
A week later, LaGarde said the European Central Bank “will do everything necessary” to protect the euro-area economy from
setbacks related to the coronavirus, including expanding on the emergency stimulus measures it announced. That comment
echoed precisely her predecessor Mario Draghi in 2012.
On March 19th, the ECB launched a pandemic emergency purchase program (PEPP)
• To buy up to €750BN of bonds, both government and corporates; country and issuer limits from existing buying can be
adjusted, if needed.
• The program is to run to at least the end of 2020.
• The ECB also extended the existing corporate sector purchasing program (CBPP) to include non-financial corporates.
• They expanded the collateral list for existing refi ops, including corporate claims.
According to observers in London, the Eurozone will not get any GDP lift from these efforts.
In 2019, Eurozone GDP advanced +1.2%. Consensus Economics in London has recessionary -5.7% Eurozone GDP growth for 2020
and a +5.4% bounce back in 2021.
Status of global energy markets
• On May 5th 2020, WTI oil prices are at $23 per barrel. Done in March 2020, the June 2021 consensus is for WTI stood at
$40.48 per barrel. Double your money?
• For energy bulls, several commodities in May 2020 show positive forward 12M consensus forecasts (Copper +8.3% Alumi-
num +13.9%, Nickel +14.0%).
• Getting the virus pandemic under control is critical. Shutdowns destroy demand for commodities. For global bears, cop-
per and oil prices in particular, collapsed after the virus spread outside mainland China.
• OPEC+ plans to cut 12 mb/day. That may be “too little too late”, but it helped.
• For domestic energy bears, a fall in U.S. oil rigs looks catastrophic. Baker Hughes counted 408 rigs on May 1st , 2020. Down
from -582 rigs from a year ago.
• 3 years charts show poor share prices by the likes of U.S. majors, XOM and CVX. A share price low got put in March 23rd.
Perhaps the majors go higher?

• Brent crude futures and WTI did plunge to “single-digit lows” and even negative marks on April 20th, as traders played the
oil market price recovery contango.
• Consensus is this: oil prices are likely to stay low as the coronavirus pandemic is keeping a lid on demand for the next 4
to 6 months or so.
• An event-driven recession consensus can be proven wrong. Be cautious here.

For the Globe on May 4th —
The economic disruption resulting from the outbreak of coronavirus disease 2019 (COVID-19) continued to hit global industry hard
during April.
Rates of contraction in output and new orders were among the steepest registered in the 22-year survey history and the worst
since the global financial crisis of 2008/09. Business confidence took a severe knock, falling to a fresh record-low. The cyclically-
sensitive new orders-to -inventory ratio also fell to its lowest ever level.
The J.P. Morgan Global Manufacturing PMI fell to 39.8 in April, its lowest level since March 2009. The downturn in the headline
index was softened by the recent relative resilience of the Mainland China PMI. The Global Excluding Mainland China PMI reading
was 35.8, down from 46.2 in March.
Manufacturing production and new orders suffered similarly steep contractions during April, with rates of reduction the third
and fourth sharpest in the survey history respectively. International trade flows also ground to a sudden halt, with new export
order intakes falling to the greatest extent on PMI record. New Export Orders indices fell to record lows in almost all nations, the
exceptions being Japan, China and Taiwan (which still signaled declines nonetheless).
The vast majority of the nations covered saw their output and new orders indices drop to series lows. This included all of the
countries included in the eurozone PMI (Germany, France, Italy, Spain, the Netherlands, Austria, Ireland, and Greece), the UK,
Poland, Russia, Czech Republic, Canada, Mexico, India, Turkey, Indonesia, Vietnam, Malaysia, the Philippines, Australia, Brazil,
Colombia, Myanmar and Kazakhstan.
Other nations tended to see near-record reductions, including the US, Japan and South Korea. The main exception was China,
which was the only nation to see a slight increase in production and by far the weakest decrease in new order intakes. If China
data are excluded from the global index calculations for output and new orders the readings would be the lowest and second-
lowest on record, respectively
Global manufacturing employment fell at the quickest pace in almost 11 years in April. All of the nations covered saw staffing
levels decline, with almost all also seeing accelerated job losses. This included 13 countries registering a survey record drop in
workforce numbers (including the UK, India, South Korea, Canada, Mexico, Australia, Malaysia, Vietnam and Indonesia).
April saw both input costs and selling prices fall. The rate of decline in output charges was the steepest in the series history.
COVID-19 caused massive disruption to global supply chains, with average vendor delivery delays the steepest in the 22-year
survey history
Europe on May 4th —
Europe marked a +1.2% estimated GDP growth rate in 2019. The outlook is for -5.7% in 2020 and +5.4% in 2021.
Euro area manufacturing experienced a substantial deterioration in operating conditions during April as government restrictions
to limit the spread of the global coronavirus disease (COVID-19) weighed on the sector. Output, new orders, export sales, and
purchasing activity all fell at record rates, whilst supply side constraints intensified to an unprecedented extent. Confidence about
the future sank to a fresh series low.
The IHS Markit Eurozone Manufacturing PMI® registered 33.4 in April, down sharply from March’s 44.5. Below the earlier flash
reading, the latest PMI was the lowest ever recorded by the series (which began in June 1997), surpassing readings seen during

the depths of the global financial crisis and indicative of a considerable deterioration in operating conditions.
Countries ranked by Manufacturing PMI: April
Netherlands 41.3 131-month low

Ireland 36.0 133-month low
Germany 34.5 133-month low
Austria 31.6 series low
France 31.5 series low
Italy 31.1 series low
Spain 30.8 136-month low
Greece 29.5 series low
Market groups data indicated that all categories recorded considerable deteriorations in operating conditions. Investment goods
producers suffered the sharpest contraction.
At the country level, PMIs were down across the region, with numbers either at record lows (Austria, France, Greece, and Italy) or
registering readings only surpassed during the worst of the global financial crisis.
Greece and Spain recorded the lowest PMI numbers, followed by Italy and France. Netherlands fared the best, but even here the
rate of contraction was considerable.
Aggregate output in the euro area deteriorated at a survey-record rate during April, as did new orders. Restrictions on non-
essential economic activities and associated social-distancing measures were widely reported to have led to a broad-based pause
for demand and production. With similar restrictions also in place around the world, combined with transportation challenges,
export trade also fell at a survey record pace.
Delays in transport routes, plus challenges in sourcing materials and company closures meant that the time taken for deliveries to
arrive at manufacturers continued to lengthen. According to the latest survey data, average lead times deteriorated during April at

an unprecedented rate in the surveys near 23-year history.
Demand for input goods was also markedly reduced as firms cut back on non-essential purchasing. Preferring instead to utilize
existing inventories to bolster cashflow and working capital, the decline in buying activity was the sharpest in the survey history.
The sharp deteriorations in output and orders meant that excess capacity continued to develop during April as evidenced by a
noticeable drop in backlogs of work. The fall was the twentieth in successive months and the sharpest recorded by the survey
since February 2009.
Manufacturers subsequently cut their staffing levels for a twelfth successive month. Moreover, the rate of contraction was
considerable and the sharpest since April 2009. Job losses were especially acute in Greece, Ireland and Spain.
Amid reports of falling prices for oil and related items, average input costs declined markedly during April and for an eleventh
successive month. Output charges also fell, and to the greatest degree recorded by the survey in ten-and-a-half years.
Looking to the coming year, manufacturers were extremely downbeat about future output. Worries about the longer-term impacts
on economic activity and demand meant that sentiment fell to a new series low in April. Of the countries covered by the survey,
Spanish, German and Austrian manufacturers were the most pessimistic of all.
Japan on May 1st --
Japan marked a +1.0% estimated real GDP growth in 2019. The consensus has -3.3% growth for 2020 and +2.1% for 2021.
Japan’s manufacturing downturn intensified during April, according to the latest PMI data, as production volumes fell at an even
faster pace than seen in March as the coronavirus disease 2019 (COVID-19) pandemic caused a further severe drop in domestic
and overseas demand. Supply chain dislocations were once again apparent as vendors shut down their operations, causing
shortages of inputs.
Employment fell at the fastest rate since June 2009 as lower operating requirements caused some firms to cut their workforces.
Meanwhile, expectations slumped to their most negative sine the index began in 2012.
The headline Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) dropped to an eleven-year low of 41.9 in April,
down from 44.8 in March, to signal a sharp decline in business conditions across the goods-producing sector.
Latest survey data pointed to a severe reduction in Japanese manufacturing production that was the strongest since March 2009.
According to panel members, output cuts were a consequence of the global COVID-19 pandemic, which had led to a collapse in
demand and factory shutdowns. Market group data revealed sharper downturns among consumer, intermediate and investment
goods makers.
Order books plunged deeper into contraction at the start of the second quarter. Latest data signaled the most severe drop in
sales for over 11 years amid reports of order cancellations. Key clients suspending their operations also had a strong impact on
workloads, according to respondents. Demand from overseas plummeted during April, outpacing the sharp decline recorded in
March by a large margin. Overall, new export orders fell at a rate not seen since the height of the global financial crisis in early
2009. Declines were overwhelmingly attributed to the global COVID-19 pandemic, which had caused external demand to collapse.
Commenting on the latest survey results, Joe Hayes, Economist at IHS Markit, said:
“Japan’s manufacturing downturn deepened in April as international supply chain paralysis intensified and global demand sank
further. Factory shutdowns and below capacity operations overseas are having a cascading effect on Japanese goods producers,
who in turn are cutting or completely suspending production due to closures at their clients and suppliers.
“Declines in output and new orders are running at rates not seen since the height of the global financial crisis in early2009. Based
on comparisons with official statistics, the latest survey data suggest manufacturing output declined by approximately 15% on an
annual basis in April.

“The outlook for goods producers in Japan will be strongly linked to the global recovery, when that eventually happens. However,
the latest figures show that until we’re past the peak of the COVID-19 pandemic and export demand can begin its slow recovery, a
sizeable chunk of Japan’s manufacturing economy is set to remain effectively shut down.”
China Caixin PMI Comment, Done on April 30th —
China marked a +6.1% estimated growth rate in 2019. Consensus has +2.0% in 2020 and +7.8% in 2021.
Commenting on the China General Manufacturing PMI data, Dr. Zhengsheng Zhong, Chairman and Chief Economist at CEBM
Group said:
“The Caixin China General Manufacturing PMI returned to contractionary territory in April, coming in at 49.4. China’s economic
recovery was hindered by shrinking foreign demand, despite the domestic epidemic being largely contained.
1. While manufacturing output expanded at a faster clip, export orders plunged amid sluggish demand. The output sub index rose
further into expansionary territory, the best performing among the five PMI sub-indexes and the only one above 50, reflecting
further resumption of work. The gauge for new export orders dropped back sharply to a level lower than that in February, pointing
to a sharp contraction in foreign demand amid the coronavirus pandemic. The sub index for total new orders worsened slightly
from a relatively low level the previous month, amid shrinking overseas demand compounded by limited recovery in domestic
consumption.
2. Amid rapid production recovery and falling demand, inventories of finished goods increased relatively fast, and growth in work
backlogs continued to slow. The sub-indexes for stocks of purchased items and suppliers’ delivery times continued to recover
despite staying in negative territory, reflecting the fact that manufacturers were well prepared for production.
3. Prices of industrial products continued to fall. Amid a plunge in global oil prices, input costs dropped markedly. The gauges
for input costs and output prices had the same reading in April. Meanwhile, downward pressure on the prices of raw materials
including glass and steel grew amid large inventories and limited demand recovery.
4. Both the gauges for business confidence and employment dropped. Unlike in February and March, manufacturers’ confidence
was not high in April as the coronavirus’s hard hit on external demand forced them to reassess the pandemic’s impact: the
economic shock may be greater than previously thought, and it may take longer for the economy to recover. Amid sluggish
demand, employment contracted at a steeper rate.
“To sum up, the sharp fall in export orders seriously hindered China’s economic recovery in April, although businesses were
gradually getting back to work. Amid the second shockwave from the pandemic, the problems of low business confidence,
shrinking employment and large inventories of industrial raw materials became more serious. A package of macroeconomic
policies, as suggested in the April 17 Politburo meeting, must be implemented urgently. It is particularly necessary to aid weak
links including small and midsize enterprises and personal incomes.”
For India Manufacturing PMI on May 4th —
India consensus real GDP growth is at +2.7% for 2019 and +6.3% in 2020.
April data pointed to an unprecedented contraction in Indian manufacturing output. The result came amid national lockdown
restrictions to help stem the spread of the coronavirus disease 2019 (COVID-19), which in turn led to widespread business closures.
In an environment of severely reduced demand, new business collapsed at a record pace and firms sharply reduced their staff
numbers. Meanwhile, both input costs and output prices were lowered markedly as suppliers and manufacturers themselves
offered discounts in an attempt to secure orders.
At 27.4 in April, the seasonally adjusted IHS Markit India Manufacturing PMI® fell from 51.8 in March. The latest reading pointed to
the sharpest deterioration in business conditions across the sector since data collection began over 15 years ago.
The decline in operating conditions was partially driven by an unprecedented contraction in output. Panelists often attributed
lower production to temporary factory closures that were triggered by restrictive measures to limit the spread of COVID-19.
Amid widespread business closures, demand conditions were severely hampered in April. New orders fell for the first time in two-
and-a-half years and at the sharpest rate in the survey’s history, far outpacing that seen during the global financial crisis.
Total new business received little support from international markets in April, as new export orders tumbled. Following the first
reduction since October 2017 during March, foreign sales fell at a quicker rate in the latest survey period. In fact, the rate of decline
accelerated to the fastest since the series began over 15 years ago.
Deteriorating demand conditions saw manufacturers drastically cut back staff numbers in April. The reduction in employment was
the quickest in the survey’s history. There was a similar trend in purchasing activity, with firms cutting input buying at a record
pace.
S&P500 Earnings at a Glance
“Bottoms-up” consensus sees –17.8% EPS growth across 2020. S&P500 EPS expectations across 2021 look ebullient, with a
snapback set at +25.1%. The 2021 EPS metrics creep further into play, day-after-day.
• Compare this scenario to flat +0.1% growth in 2019 and +20.0% EPS growth in 2018, driven by corporate tax cuts.
• In 2017, the S&P500 rose on +11.0% EPS growth.
• In 2016, the S&P500 marked a weak +0.5% EPS growth: ‘earnings recession”
• 2015 delivered -0.6%: ‘earnings recession’
• 2014 was +5.1%.
Zacks’ lower +5.7% annual S&P500 earnings estimate earlier for all of 2020, made in January, acknowledged the weaker annual
EPS prints, running from 2014 to 2017.
Zacks mostly concurs, on the snapback in EPS growth running from 2H-20 into 1H-21. The belief that virus shutdown effects likely
drag on, is our more bearish case. Consider it seriously.
As revenue outlooks, consensus uses -2.9% revenue growth for 2020 and +7.9% in 2021. These come after +3.7% revenue growth
in 2019. The three consensus revenue growth numbers can be compared to the +8.7% revenue growth rate recorded in 2018.
In terms of quarterly S&P500 data, Q2-20 gets estimated at -36.7%, Q1-20 earnings stood at -13.7% on May 1st. Q4-19 finished
at +0.9%. Q3-19 was -2.2%. Q2-2019 was -0.4%. Q1-2019 was -4.6%.
• A sea change did happen. Q4-2018 finished at +13.3%. Q3 was +25.9%. Q2-2018 was +25.0%. Q1-2018 was +24.6%.
• Q4-17 was +14.8%. Q3-17 = +6.4%. Q2-17 = +10.3%. Q1-17 = +13.9%. Q4-16 marked +5.0% y/y growth.
• A prior S&P500 EPS growth recession ended in Q3-16.

When Q2-21 S&P500 overall EPS growth get to a poor -36.7% for Q2-20, consensus envision the following: Utilities (+4.0%), Real
Estate (-5.4%), Info Tech (-8.0%), Consumer Staples (-11.9%), Health Care (-13.3%), and Comm. Services (-22.3%) will outperform.
• Industrials show a nasty -75.3% quarterly Q2 growth rate. CEOs/decision-makers were not buying optimism seen in stock
markets. They were proven right!
• Financials (-45.5%) for Q2-20 look awful for an important sector.
• Other globally exposed sectors look awful. Materials (-29.9%) and Energy (-145.6%) were stunningly poor EPS performers.
Investors – With a bottom seen on earnings marks in Q2, get optimistic on S&P500 stocks. Valuations are going to incorporate the
2021 snapback and Fed relief, more and more. Long-term investors can win big.
In sum, this will be due to: (1) evidence of a peak in virus infections, (2) the Federal CARES act, and (3) immense liquidity provided
by the U.S. Fed, the ECB, BoJ, BoE, and the Bank of China.
Other Asset Class Summaries at a Glance
DJIA Similar to the S&P500, the Dow should rise and re-collect a majority of losses by yearend. I gave Zacks yearend price target
a -10% cut last month. Regardless, buy stocks.
Still, Q1-20 earnings fundamentals were very negative. Q2 looks horrendous. Bears sell or short on bad China opening news, new
U.S. virus waves, a flat Treasury yield curve, and enduring global growth weakness.
NASDAQ Stay positive on Info Tech – on a 2021 look ahead. Follow strong Zacks Heat Map tech industries. Zacks #1 Rank IT stocks
remain worth buying.

• Entering the crisis, Info Tech profit margins were 22.5%. The
S&P500 sector average was 10.9%.
• Q2-20 Info Tech earnings are estimated at -8.0%. Q1-20 Info Tech
earnings estimates show +4.2% growth. Q4-19 EPS was +5.5%.
IT earnings should bounce back faster. Remote working is tech-
driven.
• Look back fondly, upon pre-US/China trade war quarters. Q3-18
Info Tech earnings were +21.9%. Q2-18 was +26.6%. Q1-18 was
+33.6%.
2020 looks like this: +2.2% annual Info Tech earnings growth and +2.7%
revenue growth.
2021 has 14.5% annual EPS growth and +8.0% annual revenue growth
AAPL stock, as always, is a disproportionate weight inside the QQQs. AAPL

smoked up to $325 in February 2020. I see $300 on May 5th. The stock price
was $200 in early Sept 2019. In May 2019, it was $203. A year ago, it was
$176 in early March 2019.
The S&P500 and the QQQs can rise without AAPL. But share price
momentum from this big stock (and other FAANG stocks) remains critical.
Russell 2000
Russell 2000 stocks usually lead – as markets go “Risk-on”.
A 2020 outperforming small cap “risk-on” rally can emerge only if both
U.S. and global political risk fall, and global growth shows up. Always be
mindful of illiquid small cap shorting. In ‘Risk-off” periods, shorts can cut
down unprofitable small caps -50%.
Fed Funds
The Fed provided immense liquidity across bond markets, in government,

mortgage, and corporate. Next, the timeline of the Fed’s various actions…
MARCH 19th, 2020
• Extended USD swap lines to more central banks, including major

Emerging Market banks.
MARCH 18th, 2020
• Established Money Market Mutual Fund Liquidity Facility

(MMLF) to provide funding to money market funds, secured
against high-quality assets.
MARCH 17th, 2020
• Established commercial paper funding facility (CPFF) to buy un-

secured and asset-backed commercial paper rated A1/P1.
• Established primary dealer credit facility (PDCF) to provided
funding to banks; collateral accepted includes corporates, mort-
gage-backeds, munis, & equities.

MARCH 15th, 2020
• Lowered Fed Funds Rate target range by -100 bps to 0% ‐ 0.25%.

• Lowered the Discount Rate by ‐150BPS to 0.25%.
• Started new $700bn QE program: $500bn US Treasuries, $200Bn Agency MBS.
• Reduced reserve requirement ratio to 0%.
• Encouraged banks to use capital & liquidity buffers for lending.
• Lowered rate on existing USD currency swap lines to OIS+25BPS
FOMC members will stay data-dependent. They are economists. In closing, expect all FOMC members to vote for uber-accommodative
measures into 2021.
10-yr Treasury
The 10-yr at 1.5% was here a few months ago. It is a staggering 0.65% this month.
Believe it or not, above 3.0% happened in the fall of 2018. A 10-yr rate from +2.5% to +3.5% showed the range I used across 2017.
Seeing that benchmark rate climb towards 2.0% is in play, only if the coronavirus fear abates.
In 2020 – only if the Fed changes course, based on much, much better macro data; could long-term rates start to go up more than
2.0%.
Corporate High Yield and Investment Grade Bonds
In our February 2020 poll, CIOs thought High Yield be volatile, and could see expanding spreads, as risk returns. IG spreads
should be stable.
IG corporates offer the solid coupons. Less attractive risk-free rates drive corporate bond demand. Cash on balance sheets
remains impressive. Investors should own these bonds.
In light of blown out credit spreads, I would be a careful buyer (long-term) on Investment Grade and High Yield debt, but only that
debt unrelated to the Energy sector,
Municipal Bonds
Note: In our latest poll done on February 2020, CIOs were neutral/bearish on Munis.
State tax efficient munis always look excellent for older income investors. Having written that, all bond classes get pressured by rising
rates (is a tactical bottom close?). Plan to hold to maturity (on 5-year paper?) as a precaution. U.S. rates can rise again. Yes. I know they
are very low right now. So is the unemployment rate!
The Federal CARES act should indirectly backstop most state and local entities.
WTI Oil
Consensus looks for $40 a WTI barrel by June 2021. Our oil price outlook is tied to OPEC+ agreements, U.S. “fracker” rig counts, and
any increase/decrease in global demand for gasoline-at-the-pump.
Gold
Gold trades at $1714 an ounce in early May. We cleanly broke out of the trading range in June 2019.
Gold price downside hails from a strong U.S. virus snapback, low expected consumer price inflation, and externally, on virtually any
pickup in global GDP growth rates.

NOTE: About Zacks Rank Sector & Industry Forecasts Coming Up Next --
Zacks Research System (ZRS) updates the Zacks Ranking System regularly; and groups each company into three aggregates.
Each of the ranking aggregates still apply the standard proprietary Earnings Estimate Revisions system, but they help sort things
out within a top-down context.
Zack aggregates are:

- A 16 Sector grouping (versus the S&P500’s 10 sector groups),
- A 60 mezzanine grouping, known as “Middle” or Zacks M-Rank.
- And finally, a 250+ industry grouping, we refer to internally as the X- Rank.
The table in section 6, running four pages long, applied the consolidated ranking information from the 60-industry, Zacks Middle,
or M-Rank.
Industries titles listed along with the Zacks Middle Industries are S&P500 Industries, with revisions and additions to reflect
specific Zacks industries

4. ZRS Chart of the Month

Below: Sector Forward 12-Month Price to Earnings (P/E) valuations over 3 years.
This data effort was done on May 4th, 2020.
A table (below) shows where S&P500 sector forward 12-month P/E ratios stand, as of May 4th, 2020. I list 9 S&P500 sectors. This
list excludes Energy and Real Estate.
Sector Current P/E 5 yr. High 12M PE Difference (%)

Consumer Disc. 30.69 21.51 9.18
Industrials 20.62 16.50 4.12
Info Tech 22.41 18.77 3.64
Materials 18.69 15.63 3.06
Financials 13.67 12.80 0.87
Consumer Staples 19.60 19.39 0.21
Health Care 16.20 16.12 0.08
Telcos 20.85 20.91 -0.06
Utilities 17.04 17.96 -0.92
Bullish groups? Consider the S&P500 sector P/E differences in Consumer Disc (9.18), Industrials (4.12), Info Tech (3.64) and
Materials (3.06), and in that order. This set of four sectors is worth focusing on. Long term only. They must recover EPS to get
these forward 12M S&P valuation down.
Bearish trading groups? These are groups where nothing really happened. Not much of a COVID earnings recovery play is picked
up. Relative to the 3-yr marks, low serial valuation declines are in Health Care (+0.08), Telcos (-0.06), and Utilities (-0.92).

5. Zacks Rank S&P500 Sector Picks

Zacks May Sector/Industry/Company Telescope
The Zacks Industry Rank pattern in Early May is “Stay-at-Home” directive

driven. As May to June leads to more reopened sectors, in more and
more big U.S. states, this ranking may be dated. Be careful this month.
The best groups are Utilities, Health Care, and Consumer Staples. Those
are the obvious “Stay-at-Home” plays.
Info Tech and Communication Services retain high ranks, and also imply
“Stay-at-Home” plays. Drugs are a top-notch area, as COVID19 vaccines,
treatments, and frankly stable dividends make the group tops.
Financials, Energy, and Industrials feel the most stress. Yet Investment
Funds stunningly outperform. Energy-Alternates can be held. They flash
Market Weight.
(1) Utilities went back to Very Attractive. Utilities-Gas Distribution looks

excellent. Electric Power is looking good.
(2) Health Care is Attractive. Only Drugs lead now, and by a wide margin.
(3) Consumer Staples rise to Attractive. Cons. Products Misc. Staples

and Food/Drug Retail are the strongest industry groups. That makes
shut-in sense.
(4) Info Tech remains a Market Weight. Semis are best, followed by
Computer- Software Services.
(5) Communications Services is Market Weight. Telco Equipment and
Telco Services are about equal now. Utility-Telephone still looks poor.
(6) Materials are Market Weight. What helped? Same as last month.
Containers & Glass (packaged goods in grocery stores) look good. Ditto
Metals Non-ferrous (gold)
(7) Consumer Discretionary is Very Unattractive. The Other Consumer

Discretionary group is all that looks good. Lots of poor industry groups
here.
(8) Financials stay Very Unattractive. Investment Funds look best.
(9) Energy remains Very Unattractive. But Bifurcated. Coal, Drillers, and
Alternates are OK.
(10) Industrials remains Very Unattractive. CEOs are pessimistic.

Conglomerates are the sole spot above a Market Weight.

6. Zacks Rank May Industry Tables
Zacks Forecasts for S&P 500 Industries

(As of April 30, 2020)
Very Attractive Very
Industry Portfolio (2.00 to 2.64 Zacks Attractive Market Performer Unattractive Unattractive
Rating: Rank) (2.65 to 2.81) (2.81 to 2.99) (3.00-3.20) (3.21 or worse)
Consumer Staples Cons Prod-Misc. Food/ Food Agri-business (3.19) Beverages
Staples (2.38) Drug Retail Food Distributors Soft Drinks,
ATTRACTIVE Hypermarkets Packaged Foods Brewers
& Supercenters (2.98) Distillers &
(2.77) Vintners
Tobacco (2.99) (3.28)
Consumer Other Cons Disc Non-Food Retail/ Leisure Service Home

Discretionary (2.52) Wholesale Casinos & Gaming Furnishing-
Department Stores, Hotels Appliance
VERY General Merch. Leisure Products (3.74)
UNATTRACTIVE Stores, Restaurants
Specialty Stores (3.45) Apparel
(2.98) Footwear,
Consumer Apparel &
Publishing Electronics Accessories,
(2.90) (3.61) found via: Apparel Retail
Internet Retail (3.77)
Media Computer &
Movies & Electronics Retail
Entertainment Photographic Products Consumer
Cable & Satellite, Autos/Tires/
Advertising (3.02) Trucks
Auto Retail,
Automotive
Manufacturer,
Tires & Rubber,
Auto Parts &
Equipment
Distributors
(3.91)


Energy Coal & Oil & Gas Drilling Oil & Gas Prod.
Consumable (2.93) Pipeline (3.32)
VERY Fuels (2.80)
UNATTRACTIVE Energy - Alternate Oil Exp & Prod
Sources (3.61)
(2.98)
Oil & Gas –
Integrated (3.68)
Oil Misc. – (3.69)
Financials Investment Funds Finance Insurance Invest Banking &

(1.79) Specialized & Insurance Brokers Brokering
VERY Consumer Finance Multi-Line Insurance (3.63)
UNATTRACTIVE (2.87) Life & Health Insurance
Property & Banks-Major
Casualty Insurance Regional Banks
(3.05) Diversified
Banks, Other
Real Estate (REITs), Diverse Financial
Real Est. Mgmt & Dev. Srvs. (3.69)
(3.08)
Banks & Thrifts
(3.79)
Health Care Drugs Medical Products

Biotech, Life Science Tools &
ATTRACTIVE Pharma Services,
(2.56) Health Care Equipment
(3.06)
Medical Care
Health Care
Distributors,
Health Care Supplies,
Health Care Facilities,
Managed Health Care
(3.12)


Industrials Conglomerates Pollution Control Machinery
(2.95) (3.30) Electrical
VERY Electrical Comp.
UNATTRACTIVE Railroads & Industrial Products- & Equip.
Trucking Services (3.46)
(3.13) (3.35)
Metal Fabricating Aerospace & Defense Machinery (3.46)

(3.17) (3.37)
Construction –
Business S’vices Building Services
HR & Employment (3.46)
Services
Trade Comps & Airlines
Distributors Air Freight &
(3.45) Logistics
(3.56)
Business
Products
Commercial
Printing
Office Services.
& Supplies
(4.00)
Info Tech Electronic- Electronics Computer-Office

Semiconductors Electronic Equipment
MARKET Semiconductors Components Office Electronics,
WEIGHT Semiconductor Equipment & (3.03)
Equipment
Instruments
Electronic Misc. Tech
Manufacturing Computer Data Processing &
Services Hardware, Outsourcing Services
(2.87) Computer Storage Consulting & Services
& Peripherals (3.04)
Computer (3.00)
Software-
Services Telco
Home Equip (3.01)
Entertainment
Software,
Application
Software,
Systems
Software,
Internet
Software &
Services (2.97)

Very Attractive
Industry (2.00 to 2.64 Zacks Attractive Market Performer Unattractive Very Unattractive
Portfolio Rating: Rank) (2.65 to 2.81) (2.82 to 2.99) (3.00-3.20) (3.21 or worse)
Materials Containers & Glass Metals non- Steel (3.14)
(2.59) Ferrous Chemicals
Diversified Metals Paper Fertilizers & Ag.
MARKET & Mining, Gold, Paper Packaging Chemicals
WEIGHT Aluminum, Paper & Forest Industrial Gases
(2.67) Products, (3.23) Specialty Chemicals
Diversified
Chemicals
(3.25)
Building Products/
Construction
Materials (3.39)
Telecom Telco Equipment Utility Telephone

Services (3.01) (3.27)
MARKET Telco Services

WEIGHT Wireless Telecom
Services Integrated
Telecom Services
(3.06)
Utilities Utilities Utilities Utilities –

Gas Dist. Electric Power Water Supply
VERY (2.09) (2.72) (2.88)
ATTRACTIVE

7. May Sell-Side and Buy-Side— Consensus at a Glance

Sell-Side Consensus
Note: In January 2020, the pre-virus “Bottoms-Up” target for the S&P500 was 3,441.44

“Top-Down” S&P 500 End-Of-Year Targets for 2020

Credit Suisse’s Jonathan Golub was the most bullish on the list, predicting the benchmark S&P500 index will rise to 3,425 by
2020’s end.
Golub argued that 2020 would bring a sharp rebound in economic performance similar to what was experienced in 2016 going
into 2019. He also predicted continued strength in corporate buybacks that will help the forward price-to-earnings multiple on the
S&P 500 rise from 18.1 to 18.9 by year’s end. This expansion, along with 5.6% earnings-per-share growth, forms the basis for Golub’s
target.
Morgan Stanley’s Michael Wilson was the most bearish strategist surveyed, with a base case that the S&P 500 falls to 3,000 by
the end of next year.
“Easier monetary policy and trade stabilization will help global growth accelerate, but only stabilize GDP growth in the U.S. at 1.8%,
leaving pressure on corporate margins from tight labor markets,” he wrote in a note to clients.
The Zacks view? We are +5% above Morgan Stanley (3,000) inside this early 2020 sell-side consensus. We used to be in-line
with Wall Street consensus at 3,400
The S&P500 index can get to 3,160 by YE 2020. We could upgrade this, late in the year, depending on how virus shutdowns
play out.
Background on the last 4 years--
(1) Wall Street consensus foresaw the following S&P500 outcomes in 2019. The mean 2019 close was for 2,975. The year of 2019
actually ended with a 3,230 print. This final print beat all 22 sell-side analyst projections.
Their 2019 sell-side strategist call S&P500 for operating EPS of $172.34? The actual number was a full $10 less, at $162.36.
Note: The S&P500 index marked a 2,510 close on January 2nd, 2019.
• A 3,200 YE number was +27%.

• A 3,000 YE number was +19.5%.
• A 2,800 YE number was +11.5%.
(2) In early 2018, all eight sell-side Wall Street strategists I tracked had made calls for between +4.1% to +16.0% S&P500 returns. (3
at 4%, 2 at 6 to 8%, 3 at 12 to 16%)
(3) In early 2017, 17 sell-side strategists pegged YE 2017 annual returns as bullish, from +1% (S&P500 at 2,275) to +11% (S&P500 at
2,500). Two high-end strategists were +9% and +11%. Six were “Middle-of-the-Road” bulls at +4% to +7% annually.

(4) In early 2016, 14 sell-side strategists pegged YE 2016 annual returns from -0.5% (S&P500 at 2050) to +12.9% (S&P500 at 2,325).
Five bulls looked for +8 to +12.9% returns. Six moderate bull sell-side strategists looked for +4 to +7% returns. Three sell-side
strategists showed up as relative bears. They looked for -0.5% to +2% returns.
Other Sell-Side Views
The “Equity Risk Premium” is an excess return the overall stock market provides above a risk-free fixed income rate. This excess
return compensates investors for taking on the relatively higher risk of equities.
Sell-side strategists measured the S&P 500 equity risk premium at 6.2% in early 2019. It was 6.0% in April 2020. +4.2% is the
average in the recent past. In 2020, post-virus, with stocks sold off and rates rock bottom, sell-side models show the equity risk
premium is a positive force for stocks.
But, perhaps, not as positive as you may think? For backward-looking references, the equity risk premium was +6.2% in 2013 and
6.0% in 2014. It peaked at 7.4% in 2012.
If low long-term risk-free U.S. Treasury rates stay compressed, a larger arbitrage incentive is there is to buy stocks. A 0.74% 10-yr
U.S. Treasury rate is here in April 2020. 1.5% was the mark in September 2019. Typically, add +3.0% … to compare it.
2.1% was seen in June 2019. 2.5% was in April. 2.7% was seen in March and February.
Bottom-up S&P 500 Earnings
Consensus used to call for strong EPS growth in 2020 tied to stable trend +2.0% U.S. and global real GDP growth levels across
2020.
Now, post-virus, GDP growth in 2020 is forecast at -6.5%.

• U.S. real GDP growth finished 2019 at +2.3%.

• The U.S. finished with +2.9% GDP growth in 2018.
• The U.S. saw +2.3% in 2017, +1.6% in 2016 and +2.6% GDP growth in 2015.
Furthermore, “bottoms-up “consensus forecasts on EPS growth for individual companies

in the S&P 500 index expect growth near -18.0% in 2020 and +25% in 2021.
S&P500 earnings growth was +0.1% in 2019; a lull after a strong +20.0% in 2018 and
+11.0% in 2017. However, this EPS number was +0.5% in 2016 and -0.6% in 2015.
The Zacks view difference?
2019 delivered a tariffed-down earnings growth rate and faced tough y/y comps. U.S. risk
markets achieved outstanding nominal S&P500 earnings growth in 2018 -- on corporate
tax policy. That was an anomaly.
Pre-virus, the global economy has been cut down by trade wars. Novel corona virus
shutdowns were the coup de grace. With negative earnings growth and revenue growth,
markets look to late 2020 and beyond for a strong EPS and revenue recovery.
Zacks is in sync with consensus earnings. The U.S. will witness a full-scale recovery by
January 2021. We stay vigilant and will update, as the year moves along.
Top-down S&P 500 Earnings
Top-down strategists, who track macro forces and apply top-down judgment to forecast
S&P 500 earnings, also look for roughly -18% EPS growth in 2020, and +25% in 2021;
after no growth in 2019, +20.0% growth in 2018 and +11.0% in 2017.
The finalized 2019 S&P500 earnings growth rate (+0.1%) was in line with +0.5% EPS
growth in 2016 and -1.1% earnings growth in 2015.
A poor EPS number in 2020 is ‘OK’ when placed next to the all-but-forgotten earnings
recession of 2016. The big cyclical play is to buy in front of double-digit 2021 earnings.
Small Cap, Mid Cap, and Large Cap stocks
The 2020 sell-side was looking for anywhere from +10% to -4% returns, with the mode at
+6.0%. There was no favorite style class. Post virus, these might be outperformers.
Pre-virus, this roughly mirrored the buy-side. Over the next 12 months, February 2020
CIOs forecasted returns for small caps at a +0 to +5% annual return, with similar
sentiment on mid-caps at +5% to -5.0% returns. Large caps were seen to deliver +5% to
-5% returns too.
• Value index returns outperform Growth index returns for small and mid-caps.
• Growth returns underperform Value index returns in the Large Cap style too.
2019 saw a rebound on small and mid-cap stocks.
For perspective, the small caps were on a run in 2018. 2H-2017 was when small caps
turned up. Specifically, September 2017. This followed 2 years of risk-off pessimism. 2016

recorded a bounce for small caps, with regional banks up big after the election.
Fed rate shifts, financial excess leading to recession, Trump unpredictability, and huge U.S. Treasury debt sales, and U.S.
Presidential election volatility used to mark points of worry for bears.
Now, it is all about the corona virus narrative.
The Zacks view difference?
In April, we turned bullish on U.S. growth and value stock indexes across the style spectrum. Tech stocks are where our favorite
industry groups lie. Keep weight on value indexes, away from Energy.
In addition, we see the stiff selloff on smaller cap indexes as a time to pounce, but only on ETFs, not individual risky stocks. There
is value to shifting into small and mid-cap index tracking, not names.
Large caps outside the U.S. are not favored to outperform. Yet. A stronger rotation into them would be confirmed, only if GDP
growth picks up outside the USA. China is the exception. It has recovered already.
Buy-Side Consensus
S&P 500 and Russell 2000
In February 2020, our CIOs thought that --
• The likeliest Large Cap return is -5 to +5 percent over the next 12 months.
• The likeliest Mid Cap return is -5 to +5 percent over the next 12 months.
• The likeliest Small Cap return is +0% to +5% over the next 12 months
In February 2020, buy-side consensus came in at 50% positive.
For reference, the August 2019 survey buy-side consensus came in at 48% positive.
The latest sentiment polling data compares poorly to 60% positive in April 2019, and 71% positive in January 2019.
Sentiment was 80% positive in October 2018 and 80% positive in May 2018. It was 74% positive in October 2017, 88% in April 2017,
and 85% in January 2017.
Look further back to the right analog. Sentiment marked poor numbers during the prior earnings recession. Consider 2016: 45% of
CIOs were positive on the S&P500 in October 2016 (before the election), versus 63% in July 2016 and 77% in March 2016.
S&P 500 and Russell 2000: Value or Growth
February 2020 showed small cap and mid cap Value indexes should outperform Growth indexes for small cap indexes. Similarly,
large cap Value indexes should outperform over the next 12 months.
August 2019 showed a strong preference for Value over Growth for any style of index.
The April 2019 and January 2019 and October, May, and Feb 2018 surveys, and October, August and April 2017 surveys showed a
buy-side preference for value over growth stocks in the large mid, and smalls caps.
Keep in mind. These are long-term investors, not momentum traders.
Fed Funds
In Feb. 2020, our CIOs saw the Fed Funds at 100 to 150 bps in 12 months. The survey was done prior to the corona virus outbreak

reaching full global scale and scope.
In August 2019, a majority of CIOs saw less than 250 bps on the
Fed Funds rate in 12 months: with 9% at 50 to 100 bps, 9% at 100 to
150 bps, 27% at 150 to 200 bps, and 18% at 200 to 250 bps.
In April 2019, CIOs saw Fed rates out 12 months –as 250 to 300
basis points. In October 2018, it was a lower 200 to 250 bps.
10-yr Treasury
In February 2020, CIOs had the 10-year Treasury at 1.5 to 2.5%. This
survey was done before the corona virus outbreak went to scale.
In November 2019, CIOs had the 10-yr Treasury rate between 2.0%
and 2.5%.
In August 2019, the CIO mode was 2.0% to 2.5% too.
In April 2019, (10%), 20% of CIOs had 2.0% to 2.5% U.S. 10-yr.
Treasury rates in 12 months. In turn, (30%) saw 2.5% to 3.0%. (40%)
say 3.0 to 3.5%. Another (10%) saw 4.0% to 4.5%.
In October 2018, a mode of (50%) CIOs in our survey also thought

the 10-year Treasury rate range should fall between +3.0 to +3.5%.
Look further back.
• For 2015, the 10-yr Treasury was pegged at 1.5% to 2.5%.

• For 2014, CIOs saw a higher range of 2.5% to 3.5%.
• In the dark days of 2012 and 2013, the consensus 10-yr. rate
floated between 1.5% and 2.5%.
Corporate High Yield and Investment Grade Bonds
In February 2020, CIO expect IG bond spreads to remain stable.

They expect HY bond spreads to be volatile. They fully expect these
HY spreads to expand. Similar to November.
In April and August 2019, CIOs expected IG bond credit spreads to

stay the same. The CIOs expected HY credit spreads to widen.
• Oct. 2018 had (87%) of CIOs expecting high yield (HY)

spreads to expand.
• What of late 2017 CIOs? There was similar concern. HY
spreads had come in too much. There needed to be a pull-
back/correction, in their minds.
• For reference, the Nov. 2015 CIO survey showed a majority
expected credit risk spreads (i.e. the risk a bond issuer de-
faults) on HY Corporate bonds to blow up. An Energy HY
blowout was seen in late 2015.
Municipal Bonds
In our Feb. 2020 survey, our CIOs were neutral to bearish on returns
for Munis.

In August 2019, 44% of CIOs were bearish, and 33% were at Market Perform.
In our April 2019 survey, (33%) expected Munis at Market Perform. (44%) expected Munis to be Bearish.
• In the October 2018 survey, (40%) gave this security a bearish nod. (46%) were neutral.
• In October, August, and April 2017 and in Jan and Oct. 2016--munis got a neutral to bearish nod.
Asset bubbles and debts piling up via bigger U.S. deficits are concerns in 2019 and likely in 2020.
WTI Oil and Commodities GSCI Index
In the February 2020 survey, CIOs had WTI oil at Market Perform. Again, the survey was done prior to the corona virus spread to
scale.
In the August 2019 survey, WTI oil had 70% of CIOs at Market Perform. In the April 2019 survey, (30%) of CIOs were Bullish on oil,
and (40%) were at Market Perform. (30%) were Bearish. October 2018 was Market Perform” on Oil prices too.
• October, August, and April 2017 surveys were Market Perform on Oil. Further back, Jan. 2017 was Bullish on Oil.
• October and July 2016 survey had CIOs at Market Perform. March 2016 saw CIOs get Bullish on Oil.
• November 2015 CIOs had Oil negative.
In February 2020, CIOs were at Market Perform on Commodities. Similar to November.
In August 2019, Commodities are 50% Market Perform and 30% Bullish. Commodities stayed Market Perform in both April and
January 2019.
Look back to March 2016 for when Commodities looked firmly bullish.
Gold
In February 2020, CIOs were bullish on gold. In Nov. 2019, CIOs were bearish on Gold.
In August 2019, 50% of CIOs are at Market Perform on Gold. 30% are Bullish.
In April 2019, 40% of CIOs were Market Perform on Gold. 50% were Bullish. 10% were Bearish.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This article is provided for
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common stocks.
Prospective clients and clients should not assume identical performance results to those shown would have been achieved for
their account if it was invested in the Strategies during the period. Clients of the firm may receive different performance than the
composites. Client performance may differ due to factors such as timing of investment(s), timing of withdrawal(s), and client-mandated
investment restrictions. Wholesale, retail and institutional clients of the firm may have differing performance due to timing of trades.
Investments in the Strategies are not deposits of any bank, are not guaranteed by any bank, are not insured by FDIC or any other
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fees are available on request and are described in Part 2A of Form ADV.
Returns for each strategy and the corresponding Morningstar Universe reflect the annualized returns for the periods indicated. The
Morningstar Universes used for comparative analysis are constructed by Morningstar (median performance) and data is provided to
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vs. the indicated universe rounded up to the nearest whole percentile.
Other managers included in universe by Morningstar may exhibit style drift when compared to Zacks Investment Management
portfolio. Neither Zacks Investment Management nor Zacks Investment Research has any affiliation with Morningstar. Neither Zacks
Investment Management nor Zacks Investment Research had any influence of the process Morningstar used to determine this
ranking.

Monthly Investing Update and Asset Allocation: John J. Blank, Ph.D. May/June 2020

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Monthly Investing Update

and Asset Allocation

Zacks May View On Equity Markets 2

Born from Research, Built for Performance

STOCK MARKET OUTLOOK

1. Zacks May View on Equity Markets

Want my COVID19 U.S. Large Cap stock picking strategy?

First, focus on 4 top 2020 EPS sectors for short-term ideas:

ZACKS INVESTMENT MANAGEMENT Page 2

Third, after broad-brush study at the top-down level, I would go

1. Semiconductors (where tickers INTC and NVDA are)

2. Computer-Software (where ticker INTU is)

3. Internet-Software (where ticker SQ is)

6. Retail-Convenience stores (7-11 types, LOW)

ZACKS INVESTMENT MANAGEMENT Page 3

8. Internet-Delivery Services (where ticker GRUB is)

10. Financial-Consumer loans, small business, student loans

In closing, keep the silver linings of this saga in mind.

• The whole U.S. economy is NOT shut down.

ZACKS INVESTMENT MANAGEMENT Page 4

ZACKS INVESTMENT MANAGEMENT Page 5

ZACKS INVESTMENT MANAGEMENT Page 6

2. U.S. Macro Outlook- San Francisco Fed “Fed Views”

The human toll from the coronavirus disease (COVID-19)

The uncertainty about the coronavirus is spreading through

This uncertainty has impeded the proper functioning of the

Equity prices have fallen sharply since the end of February

Spreads on riskier assets, such as low-grade corporate

The current financial conditions are also extremely

according to a recent JPMorgan Chase Institute report.

With social distancing measures and shelter-in-place

Consumer confidence also fell in March, as economic

The pandemic is also adversely affecting manufacturing

ZACKS INVESTMENT MANAGEMENT Page 8

3. Zacks Forecasts at a Glance

Top-Down S&P500 2020 Yearend Targets

ZACKS INVESTMENT MANAGEMENT Page 9

• Utilities, Health Care, and Consumer Staples led.

ZACKS INVESTMENT MANAGEMENT Page 10

What’s ‘Fair Value’ on the S&P500?

To reiterate, we need a virus shutdown approach.

First, focus on 4 top 2020 EPS sectors for short-term ideas:

Second. When to see 2021? Longer term, I would focus on a rebound

We are now watching a staggered opening of economies, both stateside

Carry on with substantial, regularly-spaced, equity market asset

On May 1st , the S&P500 “Bottom’s Up” consensus shows a Q2 EPS

ZACKS INVESTMENT MANAGEMENT Page 11

Setting U.S. returns expectations for 2020…

• 2017 S&P500 returns were +22.6%.

• In 2016, it rose +12%.

ZACKS INVESTMENT MANAGEMENT Page 12

• In 2015, it rose a paltry +1.4%.

• In 2014, it rose +14%.

• In 2013, the best year of this cycle came in at +32%.

What Produces 2020 Optimism?

Second, expert-led Public Health shutdowns get lifted properly.

In hindsight, look at the last 2 years.

ZACKS INVESTMENT MANAGEMENT Page 13

• Aging demographics builds Medical Care demand. Ditto health-exchange growth.

What’s Alive for 2020 Pessimists?

Is it time to buy U.S. stocks in early May?

A 2nd or 3rd wave can happen. Good science takes time.

What of U.S. GDP Growth?