Wakeup Call in the US – Partial Lockdown

Overnight in the Asian trading the S&P 500 future lost 5% and the trading was stopped. In North America the severeness of the crisis has now reached the public. On the other hand, we expect soon a decision on fiscal stimulus. The US is also testing more corona suspects and tries to isolate them and trace back the sources. However, it might be too late as the virus is probably already widespread.

Fig. 1: S&P 500 has had in the past deeper but slower pull backs

Therefore, more downside is in the cards.

Goldman Sachs has revised its global GDP outlook. They expect now that global GDP in 2020 will contract 1%. I would still argue that it all depends on how much time we have a lockdown. It also depends if a society has an almost 100% curfew or like Switzerland where roughly 80% are still working.

Fig. 2: GS has revised its GDP forecast from last week to minus 1%.

Fig. 3: This week we will get flash PMIs as well.

It is expected that the declines will be the largest since such data is collected. However, if you give your vote when your company is for an unknown time closed and you can only choose between it is getting worse, equal or better it is a kind of obvious how you will vote.

Therefore, we must take that PMI survey with a grain of salt.

A key question is, how far can this still go down? Based on PE multiples the S&P 500 still trades around 13 times. In history it normally contracted to around 11 times, i.e. we have roughly 10% downside risk.

Fig. 4: YTD return: Eurozone, Russian and Brazilian equites have lost the most so far

Fig 5: S&P 500 peak to trough before recessions

The US future is after the trade halt now trading halt at the 2200 level, a level which most consider a critical support. It must be seen over the coming trading sessions if we can find a bottom. What is for sure is that we will get more bad news from both the eco side as well as from the corona front.

Fig.6: Official China communication paints a picture of normality, but coal usage is still down 12%

This is however no surprise; the city of Wuhan is still completely shut down. This however means that we can expect a positive contribution to the world GDP from China in Q2.

I would argue that world equity markets will recover together with the US markets but as they have lost more than the US they might as well rise much more once a recovery rally starts.

Published: 23/03/20 by Blackfort CIO Dr. Andreas Bickel

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