‘Sudden Declines’, ‘Gone In A Flash’

Sometimes, when faced with circumstances beyond humanity’s control, you just have to laugh at bad news.

Doing anything else – mourning, wailing, waxing hysterical – is futile.

Bad economic data isn’t sentient – it’s not a thing that has a sense of purpose, and thus it has no way of knowing that we’re doing our best to mitigate the bad vibes it engenders by chuckling in its wake. But chuckle we must at the following chart, which shows the Dallas Fed gauge plunging a truly astonishing 71.2 points from the prior month.

For what it’s worth, that’s not even in the ballpark with estimates. The range was -34.8 to -5.

Those interested in responses (collected March 17—25) to some of the special COVID-19 questions the Dallas Fed asked alongside the regular survey can find the results below, but the bottom line from the March release is captured in these two words from the accompanying color: “sudden decline”.

Speaking of “sudden declines”, SocGen’s Andrew Lapthorne notes that consensus estimates for corporate profits are likely being artificially inflated by the fact that only some companies have withdrawn or altered their guidance to reflect the new, stark economic reality. That, in turn, means EPS forecasts are probably falling “at twice the headline rate”.

“With things moving so quickly many forecasts will become out of date, artificially holding the consensus higher than it should be”, he writes, in a note dated Monday.

What would happen if one were to leave out those corporates that have yet to change their guidance?

Lapthorne is glad you’re curious. “Removing these stale forecasts and focusing only on estimates posted during the past 20 days (so-called flash estimates) gives a more up-to-date picture”, he says, adding that “globally, instead of Year 1 forecasts cut by 9.2%, so far this year, the flash estimate shows a 17.2% cut, a massive 800bp difference moving the Global 2020 P/E we calculate using the standard consensus from 14.6x to 16.1x”.

The perceptive among you will immediately conclude that the read-through for equities is that even with the latest rout, stocks may still be too “rich”.

As Lapthorne exclaims, that 16.1x reflects “a fully valued market in normal times, let alone a crisis!”

Special questions in Dallas Fed survey


Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

9 thoughts on “‘Sudden Declines’, ‘Gone In A Flash’

  1. Lapthorne seems to be “on it”- so the obvious question that I wish I could ask Lapthorne is this–
    “How do you reconcile the Dallas Fed survey results and your analysis (which is now in the public domain) with the US stock market’s behavior today?”

  2. The P/E game obviously hasn’t started & won’t for at least 4 months.if you love something like Costco with a P/E of 34, are still gonna love it around 1000? If stock prices stay inflated and overvalued now, with YUGE hits to earnings, will the market accept that new norm and then also look away in denial about losses? How long will that new paradigm last??

  3. And another thing related to Costco with a P/e of 1000.

    What happens when we accept the notion the the E in P/E doesn’t matter? Well, you basically go back to the Dutch Tulip Bubble, where price is the only function, until speculators decide to pull the rug out from under the rubes, sorta like the game in place right now!

    High frequency derivative swaps have never looked so alluring!

  4. The up day for equities is still likely reflexive based on forced rebalancing buys as volumes are light. I get the sense that investors, institutional and retail, are still in disbelief about what is happening and they feel like the V recovery is just around the corner. It probably isn’t, the real economic damage is just around the corner. This market down turn is not solely about the virus. The economy (global and US) was likely headed to recession even without the pandemic and equities didn’t get that messages. All we have seen so far is the leverage get squeezed out of equities. As H aptly points out P/E are now average, but this is based on the prior 12 months activity. Now when the market starts to get honest about what the next 12 months will look like (ugly) and the P/E gets to the bear market comp of less than 10, then we will get an idea of where equities are headed.

  5. Maybe too many Christ-INANITY cult GOPers in the unofficial Megachurch Minions state(trust me- my mother in law lives in Midland…) were zealously moved to socially congregate & mix it up in the COVID 19 counties to save America’s (Japanese ilk in training wheels~)economy for the grandchildren. Maybe it wasn’t a hoax after all? Or maybe it’s just the nationalized welfare Fed not patently buying the stressed/defaulting corporate paper underpinning the crud, inc. “empire of dirt…” who knows – BlackRock and the Fed can still manipulate ETFs so there’s hope Texas trumpFilth after all?

NEWSROOM crewneck & prints