economy Markets stocks

Where’s The Floor?

"The scale of the policy panic is astonishing."

US equities ended the week with a whimper, falling sharply, but Friday’s hangover from a massive three-day surge still left the S&P with a weekly gain of 10%, the best since 2009.

And yet, traders and investors are left with far more questions than answers as they brace for a weekend of dire news around the global public health crisis and look warily ahead to next week, when a raft of key data in the US will likely reflect the hit from shelter-in-place orders and other containment measures in effect across the country.

On Friday evening, just after Donald Trump signed the largest stimulus bill in the nation’s history into law, total COVID-19 infections in the US topped 100,000.

That doesn’t bode well, to say the least.

The narrative right now is that this week’s bounce in equities was a bear market rally. “We are now trading recession”, BofA’s Michael Hartnett said. “3 million surge in unemployment claims [means] the US unemployment rate spikes to 6-7% [and] everyone expects a ‘retest of the lows'”.

Clearly, the possibility exists for a rapid recovery in asset prices given the extent to which positioning/exposure was purged and the prospect that the Fed has managed to preempt any serious (i.e., systemic) credit events. Additionally, USD funding stress is abating globally.

And yet, a recession is a recession, and we’re in one. At least one of Nomura’s updated scenarios is dire indeed. Their base case is hardly what one might call “sanguine” and the “bad scenario” sketched out in the table is rather disconcerting.


“We expect big hits to GDP growth of -43% QoQ SAAR in China in Q1, and in Q2 we expect -42% in the US, -43% in the euro area and -44% in the UK”, the bank says, adding that in a “good scenario”, growth recovers in the second half, inflation remains subdued and the Fed keeps rates at zero through 2021. Here’s a bit more color on the “bad scenario” from Nomura:

Major collateral damage to economies, such as a near double-digit US unemployment rate in 2021. Corporate defaults, bank failures and EM crises become commonplace. DM could face deflation, yet parts of EM face inflation from food shortages. Some central banks are pressured to directly monetize fiscal deficits.

If you ask SocGen’s Sophie Huynh, the range on the S&P in the near-term is likely to be between 1,800 and 2,600.

“We get the S&P 500 at 1,800 in the case of a recession, and we believe that it is the floor in the near term”, she writes, cautioning that the bank doesn’t rule out a scenario where the benchmark falls through that ostensible “floor” in the event “credit stress continues, triggering a domino effect in bankruptcies, with policymakers’ bandage being insufficient”.

Were that “domino effect” to play out, she says “the price-to-book value could be a good anchor”. In that context, the floor is 1,400, “with S&P 500 price-to-book value dipping to 1.52 as in 2007”. To be clear, that would put the S&P down nearly 60% from the highs, and would very likely shake investors’ faith in the viability of US equities as a good long-term investment, even as it would afford the brave an investment opportunity unlikely to be witnessed again for at least a century.

In any event, here’s a summary table of SocGen’s views on the near-term:


Although volatility remains elevated, it should generally come down from here barring another severe shock to investor psychology. As I’ve spent the past week discussing at length, if volatility can sustain a decline, it would have virtuous second-order, knock-on effects.

“Containment of volatility is key for markets from here because unprecedented volatility had created three self-reinforcing negative feedback loops, one between volatility and market liquidity, one between volatility and deleveraging by VaR sensitive investors and another one between volatility and funding markets”, JPMorgan’s Nikolaos Panigirtzoglou reminded clients, in a recent note. “With central banks and governments stepping up their policy responses and attempting to move ahead rather than staying behind the curve, volatility should be contained, breaking [those] loops”.

Speaking of policy responses, late Friday in the US, Dow Jones said the Trump administration is preparing to suspend tariff collections for three months as part of the sweeping effort to prevent further damage to the economy. “Companies would be liable for the tariffs at a later date”, one official said.

Whatever the case, it’s worth taking a step back to marvel at the sheet scope of the stimulus measures undertaken thus far.

“The scale of the policy panic is astonishing”, BofA’s Hartnett said Thursday, in the latest edition of his “Flow Show” series which showed the bank’s “Bull & Bear Indicator” dropping to 0.0.

Hartnett flags 62 rate cuts, $7 trillion of QE, $4-5 trillion of fiscal stimulus and notes that the shift towards yield curve control, universal basic income and Modern Monetary Theory has accelerated.


12 comments on “Where’s The Floor?

  1. Here’s a thought:. The one thing that grew faster than the stock market last week, was the virus! All the analysts, politicians and bloggers can spin this as an exciting opportunity, but I bet my ability to post here, that The Trump’s won’t be rolling eggs on the White House lawn during Easter week, with a big crowd of maga morons. Furthermore, as the contagion explodes in the next few weeks, we’ll all get to see how ineffective 2 trillion is, in the war against Mr Virus.

  2. SP500 price roughly at 12/2018 levels. Compare current situation to then – no comparison. No reason to consider 12/2018 as support.

    SP500 valuation well above 2008/09 lows. Compare current situation to then – arguably infinite Fed/govt $ preclude breakdown of financial system (how sure are you of that?) but the virus/shutdowns are multiple times more economically damaging than the RE bust. Maybe 2008/09 is support but that’s still a long way down, and maybe it’s not support.

  3. If a fast recovery from the projected lows is likely, it seems useless to own much or any Bonds right now, because equities will be a much better deal.

  4. “The fall in 5y5y swaps is largely a reflection of the collapse in oil prices, but there is more than a supply shock going on in Europe. So, the deflation risk is rising fast,” TS Lombard economist Davide Oneglia told the Reuters Global Markets Forum.

  5. PaulMiller

    There’s no price level that serves as either a floor or ceiling. It is a date, a pivot: that time that the market psychology shifts from more pessimism from optimism, or vice versa. The bear market of 2007-2009 rolled over after October 2007, when the bulk of money managers, commercial and retail investors realized that the landscaped was changing for the worse, with the housing bubble recently popped and loan defaults increasing. The bottom was not defined by a certain price level. It was the realization that in March 2009 the uncertainty of bad news became less uncertain, and the investors became net buyers.

    The uncertainty of the future from this crisis is off-the-charts. Even if the medical crisis has a time limit, the financial repercussions seem boundless, from a recovery at the end of the year to many years of turmoil. So, first the virus must be contained, or at least societies ability to function even with it. Then, the monster debts, bankruptcies, lost employment opportunities, wreckage of international trade, deflation, negative wealth effects, will be the discussion topics for many quarters, or years, afterwards.

  6. I’m a bargain hound, feeling that cash is King, but here’s the deal: if Trump, Treasury & Fed through all their ammo at pumping up stocks, we’ll get a Yuge spectrum of equities that’ll end up with Yuge p/e’s and thus super dooper microscopic earnings yields and no future earnings. Hence. Yes. Mr Pee Pee Tapes can try to buy the election with your tax dollars, but there is a Yuge cost you’ll pay later. Thus, why explode a bubble now, during the crisis, versus calming down and focusing on the real crisis. That said, more people are likely to buy bargains as a bottom takes place, rather than a Yuge panic to buy inflated shares that have limited future growth. Amen

  7. Lava, the floor is lava.

    No, seriously, it should be about 1900-2000 on the S&P, give or take. But only if this doesn’t turn into an EM sovereign default/currency crisis.

  8. The way into the Labyrinth it appears is going to prove out have been a whole lot easier than the way out…When the exit appears at the end of this tunnel the world outside will appear different.. This is an argument for keeping the solutions to common sense problems a simple as possible…Not part of human nature unfortunately….

  9. How many trillions in bonds is the Fed buying? I’ve lost track.

    What happens if the Fed starts buying stocks? or equity ETFs? Through a SPV I imagine?

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