Telling investors to sell now in the midst of the coronavirus crisis is a bit like shouting fire in an overcrowded room – even if there are no more overcrowded rooms. Still, it seems like the right thing to do.
We are not bearish for the sake of the bear. in fact, we are optimistic by nature. The market is growing over time, after all, and history teaches that it pays generously – especially in a retirement account – to keep the faith. But one of the things about the Covid-19 crisis is the speed at which things are happening. It was breathtaking. And investors need to prepare for a dive faster than they would have done in previous downturns.
Follow the action of the market last week. the
the index rose 12% to 2,789.82, its best week since 1974, and ended 25% of its March low. The corresponding gain for the
Dow Jones Industrial Average
was 13%, up 27.8% from its low. the
jumped 10.6%, taking it from 23% to the lowest.
All of these gains came after the S&P 500 fell 34% from its peak in just 33 days. This kind of speed is unprecedented. During the financial crisis, it took about 10 months for the market to drop 20%. It rallied for six weeks on the bottom before selling again and retesting its November 2008 lows. Compared to the Covid-19 tourbillon, the action at the time seemed positively pedestrian.
Yet, just like in 2008, investors should expect another test of the lows of 2020, probably at an accelerated rate.
“All of this is very typical behavior in intra-recession share prices and therefore calls for tactical caution as the market begins to digest the implications of this economic coma,” said Nigel Coe, analyst at Wolfe Research. Barron’s. “Brief and marked fluctuations in sentiment and stock prices are a must during deep recessions and were a real feature of the 2008-2009 trough process.”
The recent rebound is not exactly wrong. The Federal Reserve has largely supported the market, while investor fears about Covid-19 have recently peaked, as has the Cboe or VIX volatility index, which peaked on March 18. only stopped going down – they started going up. But now comes Coe’s economic coma. Ultimately, investors will have to stop worrying about fiscal policy and the peak of the pandemic and start worrying about earnings performance.
No one knows the extent of the damage to the economy caused by Covid-19. The recovery could be V-shaped, swoosh-shaped, U-shaped – many letters are under debate. The worst case is L-shaped, in which the economy does not rebound at all. As the numbers start coming in, investors should get more answers – and they might not like what they see.
So far, estimated profits for 2020 for S&P 500 companies have dropped by around 15%. And the cuts will accelerate once the figures are released. The cut distributed by sector is enormous. Energy benefits should evaporate. Estimates of current consumption have barely budged.
Even if we trust the estimates – never a good idea at a time like this – the stock market seems far from cheap. The S&P 500 is trading at around 15 times the estimated earnings for 2020, but 2020 looks like a lost year, which is why we prefer to look to 2021. Based on these estimates, the market is trading at around 12 times. But the double digits are higher than the 10 times that stocks have been sold near the bottom of the financial crisis.
Of course, it is not just about recovery. Brian Rauscher, head of global portfolio strategy and asset allocation at Fundstrat, is more optimistic. He examines many technical factors to identify buying opportunities and says that some have reached extremes never seen since the financial crisis. His company received a buy signal on March 20 – near the bottom – and he doesn’t believe valuations should go down.
“I would respectfully disagree with the bears who think that the valuation multiples should collapse,” said Rauscher. Barron’s. “This scenario is different: a few weeks later, we already have record monetary and fiscal stimulus.”
But with stocks rising to current levels, he too sees a downside risk, starting with the first quarter earnings season. He thinks the cuts in estimates will be huge, which could halt the market recovery in its tracks. But Rauscher is in the V-shaped recovery camp and thinks the United States will resume work by the end of the second quarter. Then the cuts will start to decrease.
“The first round of budget cuts is expected to be the most severe,” he said. “The equity guys love to watch the rate of change.” Slower declines are ultimately bullish for stocks. So when the inevitable selloff comes, Rauscher prefers to “buy the dips” than “sell the rips,” to put it in Wall Street parlance.
The long and the short
Here’s what caught our eye last week:
Take the elevator… Investors feeling cautiously optimistic about Covid-19, the stocks of some battered stocks have drawn an offer. Retailer
(KSS) rose 73%, a massive gain, even if that leaves the stock down 60% from the start, while the cruise line
(CCL) climbed 65%, but is still down 75% in 2020. Retail and travel were two of the hardest hit sectors, so it’s no wonder they saw the most great advances. Now they just have to hold them.
… And the escalator lowered.
(CPB) and grocery chain
(KR), conversely, experienced two of the largest declines in the S&P 500, with declines of 3.6% and 3.8%, respectively – for the same reason, travel inventories rose. The food and consumer staple shares have been hot since the United States began to set up in March. Campbell has only dropped 3% since the start of the year, while Kroger has increased by about 7%.
Zoom Video Communications
(ZM), which fell 11% at the start of the week, seemed to suffer the same fate, but rallied to close almost 10%.
Write to Al Root at [email protected]