Traders work during the opening bell at the New York Stock Exchange (NYSE) on February 28, 2020 at … [+]
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Given the Coronavirus pandemic, its accompanying death toll, the fear it has struck globally, and the uncertainty it has unleashed, it’s tricky to predict the future. However, we believe it worthwhile to imagine what’s possible or even likely. Here is one likely outcome that scares us.
We believe world markets and the global economy will see new lows in the coming weeks, if not sooner, spurring additional spread of paranoia and joblessness – worsening the impact of the COVID-19 outbreak.
While the masked, gloved, and socially-distanced investors as-well-as the larger public anticipate the upcoming Q1 calendar quarter earnings to be weak across the board, what might be less apparent is that CEOs and chiefs of many of these companies are likely preparing right now to set low expectations for expected performance for their full calendar year 2020. We believe, during the upcoming earnings, public companies are likely to accompany weak 1st calendar quarter earnings with setting very low expectations for the 2nd calendar quarter of 2020, as-well-as for the entire full year 2020
That’s a problem – because when that happens, there is likely to be a flight from the markets to the apparent safety of cash. We answer two questions below to explore the assumptions embedded in this scenario:
- First, why is leadership likely to set low expectations?
- Second, why is the market likely to crash in reaction to that?
For the first: leadership for most companies has limited choice. Whether you’re Apple AAPL who isn’t seeing any lines outside its store or U.S. Steel and Boeing BA whose manufacturing operations are hamstrung, or Alphabet, Amazon AMZN , or Caterpillar CAT – the more vulnerable the business, the less the choice. If CEOs set high or moderate expectations and then fail to meet them because of the pandemic-related impact beyond their control, the executives and leaders risk looking shortsighted and out of touch with reality. The ones who are less secure risk losing their reputation, their jobs, or even ruining any chance of a respectable legacy if booted at a low point.
Executive leadership would rather be in a position where they set expectations low at the outset, and the upcoming earnings would look like a good time to do so. They could set expectations very low, and risk an upfront beating to their stock in the current environment where bad news is the new normal. This possibly gives them a chance to look heroic later in the year, when they might deliver more than they said was possible for 2020. Who could get blamed when everyone is boding disaster?
Our analysis of the comparison of the current crash vs. 4 prior crashes bears out the consistent theme of sudden fall, and what we’ve learned with data.
The underlying point, which is also the answer to the second question, is clear: once leaders set expectations for 2020 low, the market has only one option left – flight. The market and the broader economy are unlikely to have a soft landing from abnormally low guidance. Why? The first one out the door loses the least. Investors, especially the smart money, know this well from experience and will rush out, only fanning the fear, and likely deepening the fall.
A lot will depend on the acceleration of the coronavirus spread in the coming days and weeks. While there is a possibility of some moderation, our cross-country comparison to forecast spread shows the pandemic is likely to continue spreading fast for at least the next few weeks of the earnings season.
Despite the likely continued spread, we do believe leaders have a choice this earnings season and hope they will exercise this choice and prove us wrong. In fact, this possible choice forms our very motivation for imagining the future and communicating it here. We would like nothing more than our ever-learning, ever-evolving leaders to think deeper, and in fact, do everything they can to improve the outcome!
So what’s a better option for company leadership?
It’s simple, though, needs courage: the courage to refrain from setting those low expectations and instead limit to stating the facts at the time of earnings. Analysts, as representatives of stakeholders, will, of course, look for, and prod for full-year guidance figures, as they’re used to. However, in the face of current uncertainty, we believe it’s prudent for leadership to replace such guidance with instead a commitment on two fronts. One, to do the best they can, and two, to keep all stakeholders informed with interim press-releases, as more becomes known.
While it isn’t ideal and will leave investors and analysts accustomed to guidance, dissatisfied, it might be best to face the truth and confess ignorance for what the year might bring
To help prepare more, we provide our complete analysis of the coronavirus outbreak’s possible impact and recovery path for a diverse set of large companies, as well as for smaller “portfolios” of Work and Learn-at-home stocks, to recovery in transportation companies.
At the same time, let’s hope for personal courage from leaders everywhere!