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Searching the Rubble of Five Recessions for an Earnings Roadmap

Seeking an S&P 500 Profit Estimate in Rubble of Past Recessions

(Bloomberg) -- Trying to find the right price for stocks based on what recessions do to corporate earnings? You’ll need a view on where to rank the coronavirus among past threats to the U.S. economy.

No one model fits. In 11 recessions since World War II, profits in the S&P 500 have fallen as little as 2%, while the median drop was 13%, Goldman Sachs says. If you’re of the extreme view that the current situation resembles 2008’s financial crisis, equities may have a lot further to fall.

“Nobody knows the play book here,” said Steve Chiavarone, portfolio manager and equity strategist with Federated Hermes. “We’re essentially trying to price in most, if not all, of the economy voluntarily shutting down.”

Searching the Rubble of Five Recessions for an Earnings Roadmap

The spreading virus and historic oil-price shock have ushered in the most volatile period in markets since the financial crisis. At Monday’s close, the S&P 500 was down roughly 30% from its February high.

Nobody can tell how deep an impact the outbreak will have. While companies have warned of hits to profits, few have projected the extent of the damage. Tony Dwyer, the chief market strategist at Canaccord Genuity LLC, just suspended his year-end price target for the S&P 500, saying it’s impossible to put a number on the toll.

“What most investors are worried about is that a recession is a foregone conclusion and what we don’t know is the severity of the recession, whether it will be another great recession or a shallow swoon,” Sam Stovall, chief investment strategist at CFRA Research, said by phone.

Searching the Rubble of Five Recessions for an Earnings Roadmap

Here’s a look at the last five downturns and what they did to earnings.

2008

A global credit crunch led to the worst recession since the Great Depression, fueling a plunge in corporate earnings that spanned six quarters and reached 44%, peak to trough. Banks, at the center of a mortgage-fueled melt-down, saw loan losses in the trillions. As credit markets seized up, a wave of bankruptcies hit the industry, claiming victims from Lehman Brothers Holdings Inc. to Bear Stearns Cos. and Countrywide Financial Corp.

S&P 500 P/E if this happens to 2020 earnings: 28.2

2001

Earnings for the S&P 500 companies dropped 23% during the economic downfall that was worsened by the bursting of the internet bubble and the Sept. 11 terrorist attacks. With demand for travel sinking, carriers such as Delta Air Lines Inc. suffered big losses. Meanwhile, tech earnings failed to live up to lofty expectations as bankruptcies among smaller phone and internet companies increased while clients cut tech spending.

S&P 500 P/E if this happens to 2020 earnings: 20.5

1990

Roiled by an oil shock that sent prices doubling in months amid Iraq’s invasion of Kuwait and a surge in unemployment, consumers quickly pulled back spending. The recession was accompanied by a credit crunch as depositors lost confidence in the savings and loan industry. Corporate profits, as a result, took a quick but hard hit, falling 21% over two quarters.

S&P 500 P/E if this happens to 2020 earnings: 20.0

1980, 1981

The early 1980s saw two separate episodes of economic recessions as the Fed tightened monetary policy to rein in inflation that was running high amid an energy crisis. Their duration appeared to have played a role in corporate profits falling. With the economy enduring a 16-month long contraction in 1981, S&P 500 earnings suffered a five-quarter, 13% decline. The damage was less severe in 1980, when the recession lasted just six months. At that time, profits slipped 3% over two quarters.

S&P 500 P/E if the 1981 scenario happens to 2020 earnings: 18.2

S&P 500 P/E if the 1980 scenario happens to 2020 earnings: 16.3

Searching the Rubble of Five Recessions for an Earnings Roadmap

Right now, signs of stresses are building in financial markets while a swath of the nation’s biggest names is maxing out credit lines, grabbing cash before it disappears. To safeguard the economy from the fallout of the coronavirus, the Fed just swept into action, slashing its benchmark interest rate by a full percentage point to near zero, matching the record low level it hit during the 2008 financial crisis and where it was held until December 2015.

Fiscal measures that economists have called for to help Americans deal with the virus outbreak are still missing, though under discussoin. The Trump administration has been debating aid packages of about $850 billion, though those talks later included spending as much as $1.2 trillion, Bloomberg News reported.

Bryce Doty, senior portfolio manager Sit Investments Associates Inc., sees the penitential for the economy to shrink 5% and S&P 500 profits to drop by half for a quarter.

“It’s going to be massive,” Doty said. “If the government and people in states don’t implement really draconian policies to reign in human interaction, the earnings hit just drags on and on and on, and you can’t get past it. That’s where you get a prolonged and permanent impact to the economy.”

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