Sunday evening started with a bang in the U.S. with the Federal Reserve’s Federal Open Market Committee announcing its second emergency (intermeeting) rate cut in two weeks, with the Fed Funds target now set at 0% to 0.25%. The markets quickly responded with a raspberry, as U.S. equity futures gyrated for a few minutes before hitting the “limit down” level of 5%.
So, the market is as impressed with the Fed as I am, as I have noted in prior Forbes columns. The plethora of cash infusion measures that were also announced with the FOMC’s rate cut have also thus far failed to move market sentiment.
Traders work during the opening bell at the New York Stock Exchange (NYSE) on March 13, 2020 at Wall … [+]
AFP via Getty Images
The Fed now has used up its ammunition. There is really very little that the Fed or any other world central bank can do to ensure liquidity remains in the financial system. Except for some weirdness in Thursday and Friday trading —which saw mortgage rates spike, for instance—this COVID-19 sell-off has been largely unaccompanied by any systemic financial system stress.
This isn’t Lehman. But that’s the only scenario the Fed can stop.
The Fed can only, as it has shown for the past 11.5 years, fight against a credit crisis. Even if there isn’t one. It’s like Sancho Panza and the windmills for Jerome Powell and co. So, there will be no credit crunch in March 2020, but credit availability did not cause the U.S. markets to finally enter bear market territory last week.
Stocks are declining for a reason that is refreshing to those of us in the old-timers’ cohort. Earnings estimates are declining and will continue to do so. COVID-19’s impact on the earnings power of Corporate America is completely unknown at this point and, frighteningly, is also completely uncomprehended in consensus earnings estimates for the S&P 500.
As of Friday’s weekly release of FactSet’s Earnings Insight, the consensus called for S&P 500 EPS for full-year 2020 to increase by 6% to $173 per share from the 2019 level of $163.02 per share.
Not gonna happen.
Only the most cockeyed optimist could concoct a scenario in which the earnings for the S&P 500 are even flat in 2020 with 2019’s level, which was essentially flat with 2018’s level. Zero earnings growth is one thing, but a material decline in earnings caused by the near complete shutdown in several major world economies and the grand funk that has enveloped the world’s largest economy, the U.S., is a very real possibility now.
We are seeing unprecedented measures being taken by governments around the globe. Every single one of those measures hurts businesses in some way, especially small businesses. I certainly never thought I would see Ireland cancel St. Patrick’s Day. Just as importantly, as Capital Economics excellent use of high-frequency data shows, COVID-19 is not a temporary impact to an impacted economy. While showing progress in the past two week, Capital’s data show that the Chinese economy has not nearly recovered to its pre-COVID-19 levels even as new virus cases have dropped to near zero.
So, I have been throwing out a back-of-the-envelope price target for the S&P 500 of 2,400 based on a multiple of 15x $160 in EPS. We were close to that number last Thursday, but, if anything, I believe that $160 ‘E’ is now too aggressive based on recent information. Also, as the wild swings of the last two weeks have shown us, psychology is very important in market action. So it would take a significant move BELOW my 2,400 S&P 500 fair value estimate to actually get me to commit new capital for my firm, Excelsior Capital Partners, to the U.S. equity markets.
With the Fed now out of the picture and the end of the first quarter only two weeks away, it is time for the market to prepare for a torrent of profit warnings from individual companies. I don’t own any individual stocks here. You should be very, very, very careful if you do.