The Stock Market has been in a complete frenzy and incredibly volatile period over the last few weeks. As the world has gone into a state of quarantine, and self-isolation, companies and businesses have seen revenue decline, and lowered demand for their products and services. It’s a tough thing to try and predict what’s going to happen moving forward with the economy, especially with all of the uncertainty surrounding earnings, federal investment, and the forgiveness of certain expenditures.
This is a Guest Post by Howie Bick of TheAnalystHandbook.com
On the bright side, as things begin to become more positive, and the outlook seems to be more promising than a few weeks ago, what lies ahead for the market is an interesting topic to consider. As each day passes, and as the curve begins to flatten more and more, people have started to regain a sense of optimism and positivity that we’ll be able to move forward and back into normalcy sometime soon.
The earnings of companies are going to be a bit difficult to predict, and much different from their prior quarterly’s earnings. Many companies have seen their income streams and revenue decline heavily, due to the recent pullback. Lots of companies are going to be reporting earnings that are percentages of what they once were. The industries most affected are going to see their revenues fall drastically, almost as if off a cliff.
Going forward, it’s going to be difficult to predict company’s earnings in Q2 of 2020, as we are unsure when the economy is going to open up, and when business and commerce will return to normal. Q3 seems like it is still available and as of now, still in play to be the time when the economy returns to life. Past that, it’s a bit difficult to predict, as the fallout is going to be tough to predict. Which companies will be affected, which industries are going to need bailouts, and what new tendencies are people going to embody?
Earnings are definitely going to be changing going forward, some companies will see their market shares back to where they were, while others will see theirs go into a declining trajectory.
Dividends are going to be hard to come by as companies have seen their profits and earnings nosedive. It’s going to be difficult to imagine companies departing with cash and capital they’ve earned, to return it to their shareholders right now. Any cash or capital will probably be used to keep the business running, or to find more ways to increase their revenue. Some companies will use their capital to purchase distressed companies or other businesses they’ve had their eyes on at a discounted price.
It’s probably more valuable to both you and the company that the company retains any money its earmarked for any dividends, as it will give them increased liquidity and flexibility in a time where those are hard to come by. It might be best to forego dividends in order to receive more of a capital appreciation in the future.
Ultimately, each company is going to have to decide what to do with their dividends for their shareholders. It’s a good thing to keep an open mind, and consider that moving forward, it might be in both of your best interests to delay or suspend any current or scheduled dividends.
Mergers and Acquisitions
Incredibly interesting topic to talk about, as the M&A market is probably going to be very intriguing for some companies, and a nightmare for others. Depending on the company’s financial position, will have a big effect on the types of deals or transactions that are in the pipeline, or to be had. Companies that have capital, strong balance sheets, and are in good financial standings, will probably try to find ways to take advantage of the decline, by finding or scooping up companies at discounts to the values they were once at. It will probably be an interesting time to be in the M&A field during this time of economic uncertainty.
Buybacks have been an incredibly hot topic in recent days, most notably in regard to the companies who will receive federal bailouts. It’s interesting to imagine, any company would find more value in purchasing their own stock, rather than trying to use their liquidity or capital out in the marketplace. Companies are now in a position most likely, to find more value in other companies and businesses, rather than their own. As prices and valuations have come down, it’s become an incredibly attractive time to have available liquidity ready to deploy.
Volatility has become somewhat of a norm in the days we find ourselves in. The market has seen incredible swings in the market, both up and down. Depending on the news, the state of the market, or the world response to the pandemic, has caused massive selloffs, and fast climbing days as well.
The volatility the markets experienced in March, were truly a rare occurrence. With days going from up 10%+ down 10%+, it was a time of heightened uncertainty. With questions surrounding every business, every market, and every company, the volatility was with good reason.
Going forward, the market will hopefully stabilize and regain a sense of normalcy. With bad days at roughly 3% declines, and good days at 2.5% increases, hopefully buyers and sellers will begin to get a better grasp of the economic impact of the virus, and the market will return to some stability.
As the world continues to move forward from the coronavirus pandemic, the market is going to be different than it was before. Companies’ earnings are going to be much different than previously predicted, as well as the future earnings a company may expect to generate. Going hand in hand with earnings, dividends are an interesting question to be answered by each company. Deciding whether to preserve and keep the precious amount of capital they do have, or to continue distributing dividends to their shareholders.
Building off capital, mergers and acquisitions is going to be quite an interesting dynamic in the near future, as companies’ valuations and prices have decreased, and select companies are ready to invest and take advantage of the discounted prices. What companies decide to do with the capital they possess, will be important in determining their financial future, and financial performance of the company’s in the future. In the time after all these decisions have been made, some companies will be better positioned than others. If you’ve ever wondered “what does a financial analyst do?“, they’ll be the ones evaluating the decisions each company made, and determining who is poised to come out of the coronavirus pandemic, stronger than they were before.
As more times continue to pass, we’re hoping the world begins to reshape itself into a state of normalcy, and a more familiar place than we’re living in. We’re hoping all the economic indicators and signals begin to take a more positive turn, so we can all move forward from this outbreak.