Humility Lands on Street Pros Who Thought They’d Seen It All
Down 10% one day, up 9% the next, a 12% crash the next with halts going off everywhere. Investors are at a total loss.
(Bloomberg) -- Down 10% one day, up 9% the next, a 12% crash the next with halts going off everywhere. Investors are at a total loss.
It’s been a lesson in humility. No historical comparison works, no model, no chart of valuations or profits. The coronavirus shuts down more cities, countries and businesses each day, you think you’ve seen the worst, then the Dow tacks on a 3,000-point plunge. Who knows what’s next?
“We’re not medical professionals,” said Dave Lafferty, chief market strategist at Natixis Investment Managers, which manages over $1 trillion. “Because we can’t model the length or severity, we can’t model the economic impact. And because we can’t model the economic impact, we also can’t model earnings and PE ratios.”
Feeling this helpless is new for the normally confident investors and traders of Wall Street. In a little over three weeks, the S&P 500 has plunged almost 30%. The last time it moved that much in a calendar year was in 2008.
Research shops are re-calibrating forecasts only to re-work them again, a few days later. At the end of February, strategists at Goldman Sachs Group Inc. projected zero profit growth for U.S. companies. Last week, they said earnings will drop at least 12% in each of the next two quarters. Strategists at JPMorgan Chase & Co. lowered their profit expectations, and Jonathan Golub at Credit Suisse Group AG slashed his year-end S&P target.
Tony Dwyer at Canaccord Genuity LLC gave up altogether, suspending his year-end projection for the S&P. The firm’s chief market strategist said coming up with a forecast has become impossible, not just because of the economic shutdown but also because the positive monetary and fiscal responses are just as historic.
“The uncertainty leads to high skepticism and whatever forecasts we make are simply best guesses and also tend to rely on historical comparisons,” CFRA Research’s Chief Investment Strategist Sam Stovall, said by phone. “History is a great guide, but it’s never gospel.”
Some took comfort in cheaper valuations. Others have no idea how to value equities in a world of zero rates. Natixis’s Lafferty says it leaves investors unable to judge the value of future profits. Looking at the Fed Model, for instance, a method that compares corporate profits to bond yields, would imply a price-earnings ratio of infinity.
“Clearly we reach a point where lower and lower interest rates and lower overnight rates do not justify infinitely high PEs,” he said. “We’ve hit that point.”
Paul Nolte, a portfolio manager at Kingsview Investment Management in Chicago, has been in the business since 1986. To him, the coronavirus outbreak “feels like nothing else.” The closest he sees as a comparison is World War II, a period when there were restrictions on food and gas. Except governments are imposing restrictions on movement right now. “We’ve never been asked to stay in place,” which could have a serious economic impact, he said by phone.
At Sundial Capital Research, Jason Goepfert admits it might be worth throwing out historical comparisons altogether.
“There’s really nothing that investors have faced that can equate to not only the social, fiscal, and monetary developments over the past week, but also the price and selling intensity,” Goepfert, the president of Sundial, wrote to clients. “These are uncharted waters.”
To contact the reporters on this story: Sarah Ponczek in New York at sponczek2@bloomberg.net;Vildana Hajric in New York at vhajric1@bloomberg.net
To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi, Rita Nazareth
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