We have been, and remain, cautious. Quite frankly, we were always skeptical of a surge in equities as we saw in 2019, where earnings played no role, never mind a minor role.
We said repeatedly that rallies built on Federal Reserve liquidity alone are rallies you can rent, not own. And this surge we saw last year, especially in the fourth quarter, took price-to-earnings, price-to-book and price-to-sales multiples to unsustainable levels.
Who had ever heard of the coronavirus before late December? Everyone knows about it now. But if it wasn’t this spreading illness, it would have been something else – like this year’s election and a Bernie win on Super Tuesday or beyond. Or some surprise out of Iran. Or the trade spat between the U.S. and Europe.
The bottom line is that the damage to the market would have been a lot less intense had it not been so expensive and investor complacency so rampant heading into February. This is why the market decline was far milder around SARS – market valuations were more appealing, and sentiment following the Enron and WorldCom debacles quite depressed.
That said, value in equities shall soon return and many sectors have already been beaten up badly. The question will be whether we reprice for a recession or just a mini-slowdown. But nobody ever has to be fully in or out and this game of investing is always about probabilities of outcomes.
I do want to say that this virus at some point will stop making the front pages, there will be a few more multiple points of price-earnings contraction – and I will be turning bullish as the shills turn bearish.
Just take a look at the following list as a reminder that every single year there is always something to worry about. Last year, the market didn’t pay much attention to the trade frictions, but it has started to pay attention to this spreading virus and its global economic impacts.
- 2010: Double-dip recession risks
- 2011: U.S. debt downgrade
- 2012: Default risk among Europe’s “PIGS” (Portugal, Italy, Greece and Spain)
- 2013: Markets have a “taper tantrum”
- 2014: Ebola outbreak
- 2015: Oil price plunge, energy recession
- 2016: Chinese currency devaluation, emerging markets turmoil
- 2017: First year of Trump presidency
- 2018: Fed overtightens, yield curve inverts
- 2019: U.S.-China trade war
- 2020: Coronavirus
There will be a buying opportunity, that I can guarantee you. What level it will be at, though, is anyone’s guess. But we probably aren’t there yet – we have seen several 10 per cent to 20 per cent corrections this cycle without there being a recession; and if we get a recession, we likely are talking about a market decline of 20 per cent to 40 per cent.
The main point here is that even if we get a recession, the world is not coming to an end, especially if you are positioned for it. As of Thursday’s close, of course, we have a garden-variety correction in U.S. markets, which is a decline of at least 10 per cent from a recent peak.
Let’s contain our bearishness, take heed of the table of events, and realize the benefit of 20-20 hindsight that market corrections do pass, even as we live in the moment and can’t see the light at the end of the tunnel. This too shall pass. Remember, the United States was supposed to have a double dip recession; Greece was supposed to default and cause the euro to dissolve; the U.S. debt downgrade was supposed to trigger a surge in bond yields; the Trump presidency was supposed to cause a market collapse on its own. None of these happened. What did happen was that, within six months, we were talking about something else. And that something else, this time around, is bound to be November’s U.S. presidential election.
David Rosenberg is founder of independent research firm Rosenberg Research and Associates Inc.