The news about Coronavirus continues to get substantially better. The CDC updated its infection fatality rate (IFR) estimate to 0.26%. This means that, if one is infected, they have a 0.26% chance of dying. Initial estimates hovered around 1.5-3%, which shows how drastically wrong they were. Now clearly one has a higher chance of death if they are elderly, or have substantial co-morbidities. Sadly, nursing homes and long-term care facilities have been devastated by the virus, resulting in roughly 40% of the deaths to this point, but it is very possible that number creeps up closer to 50%, once we get the true final tally. A similar dynamic has occurred in Europe on all those metrics. Testing capacity has increased dramatically, and the positivity rate of the tests are declining.
States are beginning to reopen, and while tremendous damage has been done by the closure, stimulus and pent-up demand should create a rapid recovery from the darkest depths that we have been in. We aren’t going to get to full employment anytime soon unfortunately, but we should be in a heck of a lot better position a year from now. This is all great news for companies and stocks that are reliant on a reasonable economy to be successful. The nature of this bizarre black swan event favored technology and healthcare names, but the recovery should be most extreme in these cyclical companies, as they rebound from their immensely cheap valuations from when things looked bleakest. Banks and insurance companies offer exceptional opportunity to see returns of 50-150% over the next couple of years, which would simply put them closer to their 52-week highs in many cases. That similar phenomena has occurred in many recoveries, so we are well positioned to benefit.
Very encouragingly, J.P. Morgan CEO Jamie Dimon had some words about the economy and the banking industry today in an industry conference:
To summarize, he said that “banks may not need to build more loan loss reserves in the 2nd half of 2020.”
This is the dynamic I’ve been talking about, due to the nature of a regulatory accounting change, which front-loads all loan losses. Keep in mind, these companies trade with 20-25% normalized earnings yields and a discount to liquidation value in many cases.
He also said “the Q2 trading environment is as strong as Q1s.”
Q1 was fantastic for trading for the big banks, and Q2 is normally a weak quarter, but this year it is tracking exceptionally well. That bodes very well for earnings and speaks to the strength of the industry.
He said “about a third of consumers requesting forbearance haven’t used it and expects high repayment rates for those exiting forbearance.”
“Things would have to get substantially worse for banks to cut their dividends.”
Keep in mind, many of the banks are paying 3.5-8% dividends. Eventually, they will start buying back stock again, which would be immensely accretive and likely would bolster the stock prices from these levels.
Dimon is a straight shooter and isn’t the type of be a cheerleader. His sentiments are in line with our research on the sector. The market itself is not cheap, but value has never been cheaper relative to growth by many metrics. We have a huge opportunity to go on a long and robust run. I’m immensely optimistic, but let’s not focus too much on the short-term, and keep our focus on long-term investing and reaching our financial goals. Things were terrible for a few months and many stocks crashed, but as fundamentals play out, I believe absolutely we will see that strong recovery needed. We are in great companies with valuations too good to last.