The S&P 500 (.SPX) recovered by more than 10% in the past two trading sessions, bringing the index just shy of 2500 again. Investors may want to ask themselves how much further it can rise given the current circumstances.
The index is down around 23% year to date, with stocks in the rest of the world down slightly more in dollar terms. The speed of the selloff has been unparalleled, but the current bounce means the S&P 500 is back above the lows hit during the December 2018 slump.
If this is the bottom, the Federal Reserve and the world’s accumulated economic policy makers deserve unrestrained praise: They would have ensured that what is probably the sharpest global economic shock ever resulted in a bear market that is merely mid-ranking.
Though some investors are nursing serious wounds, the absence of major financial blowups is notable given the level of stress in markets. The banking system seems to be functioning as well as might be expected, for now.
But even if there are no major financial icebergs lurking beneath the surface—by no means guaranteed—markets still appear too sanguine on the real shock to the U.S. economy.
Based on the number of Americans working in jobs that require direct contact with others, and the number in higher-risk unsalaried positions, St. Louis Federal Reserve economists estimate that 52.8 million Americans could be unemployed next quarter. That is 32.1% of the labor force, a ninefold increase in joblessness.
Even presuming that 90% of the workers furloughed return to their previous jobs in a few months at previous salaries and that the businesses they work for resume exactly their previous health, that would leave an unemployment rate of something like 6% based on the size of the labor force now. That level of unemployment was last seen in mid-2014, when the S&P 500 was struggling to break north of 2000.
And even in the best recovery scenario, there is little discussion about long-term impact on confidence and consumption. Research suggests that even after relatively short bouts of unemployment, workers keep their consumption lower to rebuild financial buffers eroded during their joblessness.
We still know uncomfortably little about the virus and, more important, about the efficacy of the various methods employed to halt its spread. But most scenarios look worse than the one markets appear to be anticipating. Secondary outbreaks in regions that appear to be past the worst, or even to have defeated the epidemic, are a grim possibility.
Debate will rage for years about how poorly prepared markets were for this crisis—whether they gave too little weight to high corporate debt levels for example. On a price-to-earnings measure, equities were richly valued when the storm struck. And at 14.4 times earnings for the next 12 months, the S&P 500 is still priced close to its 15-year average, nowhere near the lows reached in 2011, when that multiple fell to as low as 10.
Of course, it isn’t impossible that the bottom has been reached. But cautious investors might want to ask whether they see more opportunities for U.S. equities to rise 10% in the next month, or fall 10%.
It is hard to escape the conclusion that, especially in the equity market, current pricing still reflects an optimistic take on the range of economic and public-health outcomes.
|For more news you can use to help guide your financial life, visit our Insights page.|