Stock
Market Investors Are Too Optimistic
A 27% recovery in equities is surprising. We still have no idea of
Covid-19's lasting impact on economic output.
By
April 17, 2020, 4:00 PM GMT+10
V-shaped recovery?
Photographer: JOHANNES EISELE/AFP
Marcus
Ashworth is a Bloomberg Opinion columnist covering European markets. He spent
three decades in the banking industry, most recently as chief markets
strategist at Haitong Securities in London.
COMMENTS
There has been a V-shaped
recovery; in the stock market, not in the economy. That is dividing opinion between
the doomsayers who think this divergence makes no sense, and those who
believe that the Federal Reserve and its central bank peers have this covered —
and that they’ll restore the economy to its former state. That doyen of bargain
hunters, Warren Buffett, has been conspicuous by his absence from the recent
spate of share buying. Notably, he’s been a net seller of airline stocks.
The
S&P 500 lost one-third of its value between its record high on Feb. 19 and
March 23. It has clawed back half of that as the Fed chucked out its rule book
and went on a shopping spree for assets. Equities are pretty much the only type
of security that it won’t be adding to its ballooning balance sheet, although
a fresh bout of market mayhem might change that too. America’s
central bank is already snapping up exchange-traded funds and junk bonds, after
all.
Virus
Meets Stimulus
The S&P 500 has made
back half its virus-induced losses in short order
Source: Bloomberg
A 27% recovery in
equities is surprising given that we still have no idea of the virus’s
lasting impact on economic output, with only a very partial return to business
activity planned and no vaccine in sight. The surge in jobless claims and
companies furloughing staff makes forecasting more art than science, much
like Covid-19 statistics.
As Torsten Slok, Deutsche Bank AG’s chief economist, points out, a decade
of U.S. employment gains have been reversed in a month. The International
Monetary Fund's global economic predictions this week signaled the bleakest times
since the 1930s.
The monetary and
fiscal response has been spectacular but can it prevent a permanent loss
of growth if people’s consumption, travel and working practices have been
altered fundamentally? A wave of defaults, credit downgrades into junk
territory, bankruptcies and price drops in real assets such as aircraft and
property would change the more positive stock market narrative quickly, as
would a second wave of the virus. Parts of the world, Europe in particular,
were at risk of recession before the outbreak. Crude oil prices below $20 per barrel don’t suggest global demand will come
roaring back.
The
equity market is meant to reflect anticipated corporate earnings, and although
it’s often given to wild optimism, this is an entirely new situation. How
can anyone say with a straight face that they can estimate future earnings
right now? There’s little point scouring through first-quarter results
apart from looking at how much provisioning the banks are putting in place for
loan losses and how much credit has been drawn down.
Any
crisis throws up winners — Amazon.com Inc. shares have hit new highs — but most
companies are losing. More than half of workers are employed by small- and
medium-sized enterprises, which will struggle to get all the financial
assistance on offer.
The latest Fed stimulus
package adds another $2.3 trillion of support and from
this week corporates can go directly to the central bank for commercial paper
funding. The ability of the Fed to really sustain stock prices is going to be
tested like never before. More stimulus is always being promised but after a decade
of quantitative easing, there will be a limit to its effectiveness.
Catastrophe
has been avoided but most of the emergency measures are geared toward liquidity
and borrowing costs. Growth is the thing that matters most for equity
valuations in the medium term, and no one can guarantee that.
Consumers will only return
to familiar spending habits if they have regular income and governments don’t
raise taxes to pay for the current splurge. More dividends will be cut or
cancelled. The hit to earnings will only be partially recoverable as most
consumption is immediate and large items such as cars and electrical goods can
be put off for other years.
Equity markets are betting big on the lasting results of all the
stimulus. A swifter end to lockdowns or a promising vaccine development would
be something to get excited about. Until we have that, the confidence looks overdone.
No comments:
Post a Comment