economy Markets stocks

For One Bank, A Global Recession And A Bear Market Just Became The Baseline Forecast

"...it is much too early to declare this episode as being done."

One persistent source of consternation for critics of what, until three weeks ago anyway, was an inexorable ascent for US equities, was the seemingly unrealistic assumption of a "hockey stick" inflection in earnings growth during the back-half of 2020. One argument is that the market, being the forward-looking beast that it is, was looking ahead to 2019 when, during 2018, equities sold off hard despite record profit growth (courtesy of the tax cuts). By that logic, 2019's blockbuster equity gains amid decelerating (and eventually falling) earnings growth meant that the market was pricing in an inflection in 2020. That argument was made by the likes of Ned Davis, for example. "Although over the long-term it is true that stock prices are positively correlated to earnings growth, over the the short-term, stock prices tend to be inversely correlated", a note from December reads. Read more: Prophesying Profits. By that rationale, the following chart isn't all that surprising, let alone alarming. But, as the chart title (and subtitle) emphasize, the idea that corporate America is going to come out of the current (shallow) earnings recession and deliver on expectations for solid bo
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11 comments on “For One Bank, A Global Recession And A Bear Market Just Became The Baseline Forecast

  1. payshunt says:

    When a test is widely available then covid-19 will be seen to be under control. Have a fever? Get tested. That bottom will happen long before vaccines or cures are invented. Recession seems an excess of extrapolation

    • Anonymous says:

      Possibly. Another equally probable scenario is that widespread testing reveals significant outbreak in USA, and we see a repeat of the consumer paralysis that occurred after 9/11. You’ll recall that 2002 was a bad year for SPX.

    • Anonymous says:

      I hope our company will be able to make up to 20 million PCR tests by the end of the year; well, at least 10 million. Along with other companies, we will be able to test perhaps up to 50 million Americans.
      I can forecast the number of true positive, but this forecast will not make you happier.

  2. Anomalous2 says:

    What if you have no fever, pass the test, and are spreading the virus? And the thing is mutating. Similar to current versions of flu with a higher mortality rate. Could be seasonal as flu too.

    Probably are scientists who could provide good information on the pandemic, after Pence assures it is simple enough to understand for we good citizens.

    And the President has good hunches we can depend on.

    Yeah, it’s almost over.

  3. mfn says:

    No way 1Q growth in U.S. isn’t sub 2% — i.e., lower than 4Q19. And no way 2Q growth in U.S. isn’t lower than 1Q growth (i.e., < 1.7%). Two consecutive quarters of slowing growth is the technical definition of a recession.

    • Anonymous says:

      MFN, sorry to nitpick, but a recession is technically 2 consecutive quarters of NEGATIVE growth rates.

      Going from +2 to +1.5, then from +1.5 to +1.0 is not technically a recession.

      It’s not good, but not a recession.

      Hope this helps clarify.

      • mfn says:

        Ah, yes, stupid of me. In which case hard to see U.S. falling into technical recession. On the other had, significant slowdown in growth seems baked into the cake. Watch those credit spreads.

    • payshunt says:

      That is the curious thing. The US baseline has two quarters down but the World baseline has a sharp recovery in the 2Q20.

  4. Anonymous says:

    I certainly hope that the rosy predictions in this thread are correct. However, the data that we currently have available to us would suggest that this virus is somewhere on the order of 20-34 times deadlier than the seasonal flu, and the number of cases has been increasing exponentially where containment efforts have failed. The data also suggest that the percentage of patients that need ICU level care and mechanical ventilation is also quite high.

    Is there significant selection bias in the data due to a lack of widespread testing? Absolutely. Is it possible that the mortality rate will end up being lower than the current estimates? Sure.

    That said, if even the most conservative estimates for mortality, serious illness requiring ventilatory support, and growth rates hold, this virus has the potential to place tremendous strain on our health care system. We may find ourselves with an inadequate number of ICU beds, ventilators, personal protective equipment, and healthy ICU staff to care for all of the patients presenting with respiratory failure due to Covid-19, let alone the run of the mill conditions that hospitals are currently managing.

    It will be interesting to see what happens in Italy in the coming days/weeks. They appear to be getting close to reaching their capacity to care for critically ill patients in parts of the country, and we may see hospitals in Italy forced to make tough decisions regarding which patients to offer (or deny) ICU level care. What happens there will likely be a preview of what we’ll be dealing with in a matter of weeks.

    • calh0025 says:

      And the corresponding economic impacts of paying for that much care in the US. No centralized health care means that’s a massive amount of consumer spending sapped. A good scenario is now looking like this is a serious headwind for a year or two.

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