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U.S. equities scored the best August since 1986 while setting a record high on Tuesday the 18th that made the thirty-three day coronavirus bear market of 2020, a 34% decline from February 19 - March 23, the shortest in market history. The new bull market is being fuelled by record fiscal and monetary stimulus, economic recovery and vaccine hopes and has rallied over 50% from the March low. What remains to be seen is if continued U.S. growth will suffice to end the current recession as one the sharpest and shortest on record as well.
In the fiscal cliff political arena, stimulus negotiations remain deadlocked with the Democrats recent rejection of the current $1.3 trillion Republican proposal. At month end, Evercore ISI’s economist Ed Hyman wrote in ‘Global V-Shaped Recovery’: Looking ahead, there are a number of factors that will lift US growth, eg, the surge in Consumer Net Worth, inventory rebuilding, the surge in vehicle production, the housing boom, reopening’s, and unprecedented global stimulus. A vaccine is likely…The US economy is starting a new expansion…The safest bet now is for a 5-year expansion with a 100% rally in the S&P. He may be right and we hope he is, but there will be some speed bumps along the way.
Following a major two-year review, Fed Chair Powell spoke at Jackson Hole on August 27th detailing the Fed’s conclusions for updating its monetary policy framework by moving to a flexible average inflation targeting (FAIT) approach. Bottom line: keep interest rates low to support a sustainable economic recovery. On August 19th, Barron’s financial writer Andrew Bary highlighted a G.research report on ViacomCBS (VIAC) by analyst John Tinker saying: ViacomCBS looks significantly undervalued based on the success of its streaming strategy and a potential sale of the company…Tinker's view is that ViacomCBS is valued cheaply at just 6.5 times estimated 2020 earnings before interest, taxes, depreciation, and amortization (EBITDA). That compares with a price of 15 times EBITDA that Walt Disney (DIS) paid for Fox's (FOXA) content assets in 2019 and a price of 13 times that AT&T (T) paid for Time Warner in 2018. Tinker's ViacomCBS target equates to about eight times estimated 2021 EBITDA.
Since the March stock market low, value stocks, typically defined as cyclical or economically sensitive companies, have lagged growth stocks. We expect this to change as the economic recovery broadens and the value P/E discount narrows
Looking at the merger arb space, the momentum of dealmaking in July, carried into August as Global M&A totaled $290 billion, an increase of about 2% from 2019 levels. The U.S. led the way in dealmaking, with volume totaling $152 billion, or an increase of 6% from last year.