How Far Will The Market Fall?

[OmegaTrader]

At some point there needs to be a real economy producing things not just government printing money.

I don't know where the limit is but there must be one. Eg it wouldn't work at 100% that's obvious so there's a limit in there somewhere.

Maybe it is designed to keep those businesses that are viable going, while those that are not viable, do not reappear after this is over.

Worse case scenario seems to have started.

1)The stimulus is only to help with the virus temporarily
2)High probability virus economic impact will eventually diminish to negligible
3) High probability people will spend, work and travel again

My real question is really directed to the numerous people who are saying it is 1929 chicken little chicken little.

Its easy to say this is the end everything is 90% down the property market will crash etc.

I cant seem to understand why or how this will happen.
If someone can just give a rational explanation of how it will happen.

How will this temporary virus lead to a deleverage.

 

[Sdajii]

Any thoughts on what the market does tomorrow if we announce a lockdown tonight?

I'm seeing government videos telling Australians they need to accept they will be giving up their human rights and freedom and they need to just accept it and trust the government. I'm hearing governments around the world are saying this. The world is just about under house arrest.
I wouldn't be surprised if the market doesn't open tomorrow, but if it does there will either be some funny business or it's going to be ugly.

 

[moXJO]

1)The stimulus is only to help with the virus temporarily
2)High probability virus economic impact will eventually diminish to negligible
3) High probability people will spend, work and travel again

My real question is really directed to the numerous people who are saying it is 1929 chicken little chicken little.

Its easy to say this is the end everything is 90% down the property market will crash etc.

I cant seem to understand why or how this will happen.
If someone can just give a rational explanation of how it will happen.

How will this temporary virus lead to a deleverage.

Sorry, I mean worse case for businesses.
Stimulus is not going to save them unless it only shuts down a week. Some rents are enormous along with other costs. The flow on effects of unemployment, missed debt payments, The list is numerous.

Should be a slaughter on the market tomorrow imo. Dow was already down on Friday so sentiment was already shitey.

 

[IFocus]

1)The stimulus is only to help with the virus temporarily
2)High probability virus economic impact will eventually diminish to negligible
3) High probability people will spend, work and travel again

My real question is really directed to the numerous people who are saying it is 1929 chicken little chicken little.

Its easy to say this is the end everything is 90% down the property market will crash etc.

I cant seem to understand why or how this will happen.
If someone can just give a rational explanation of how it will happen.

How will this temporary virus lead to a deleverage.

Locking down populations for an unknown time frame worldwide for possibly up to and beyond 12 to 18 months, never been done before lots of unknowns along with when it all ends.

Yes high probability in fact certainty of it all ending but no one and I mean no one knows what that looks like.

 

[IFocus]

Any thoughts on what the market does tomorrow if we announce a lockdown tonight?

I think the market will price it in regardless of when the announcement is made.

 

[satanoperca]

I'm seeing government videos telling Australians they need to accept they will be giving up their human rights and freedom and they need to just accept it and trust the government. I'm hearing governments around the world are saying this. The world is just about under house arrest.
I wouldn't be surprised if the market doesn't open tomorrow, but if it does there will either be some funny business or it's going to be ugly.

And donald thought he could play the trade game. The chinese govnuts will be laughing at the end of this at dumb western societies.
Let the games begin.

 

[Sdajii]

And donald thought he could play the trade game. The chinese govnuts will be laughing at the end of this at dumb western societies.
Let the games begin.

Their plan is unfolding well, they're probably pleased at this point, but I'm guessing they're not yet complacent. Assuming the rest of the world doesn't just submit, there will be retaliation and it'll get much worse.

This isn't about a virus.

 

[aus_trader]

They can't cope, taxpayers will be picking up the bill. I really hope governments take equity as part of their bailout packages. But I doubt it.

Wouldn't shareholders be screwed if they start touching the equity of companies ?

 

[Smurf1976]

I think the market will price it in regardless of when the announcement is made.

With so many things now cancelled or shut a formal lockdown is fast becoming a technicality anyway.

 

[OmegaTrader]

4800 support

Fall

 

[Smurf1976]

My real question is really directed to the numerous people who are saying it is 1929 chicken little chicken little.

Its easy to say this is the end everything is 90% down the property market will crash etc.

I cant seem to understand why or how this will happen.
If someone can just give a rational explanation of how it will happen.

According to a previous post (#309), GDP loss in 1929 was 26%.

Various estimates already put GDP loss in 2020 at a comparable order of magnitude. Goldman Sachs says 24%, others have differing figures but nobody's saying 1% or 2%, we're looking a big number most certainly.

A particular difficulty is that when this all ends, when the lockdowns are lifted, two basic problems arise:

1. Many businesses will likely have failed given a significant period of zero income meanwhile costs continue to be unavoidably incurred.

2. A large portion of consumers have lost money either due to financial market declines, loss of paid employment or loss of business profits.

3. Governments will have truly astounding debt levels. That's going to have an impact somehow.

End result is that consumers have less money to spend and less to spend it on. There's the ongoing GDP drop which will take quite some time to recover from.

Even if someone could fly from Melbourne to London on the 1st of October 2020, there's not going to be too many people who have any interest in doing so unless the flights and accommodation are stupidly cheap. Most are going to be trying to restore their own investment balances, businesses or employment at that point, they're not going to be spending on non-essentials like major holidays indeed may workers won't have any leave available anyway.

Now consider that every other non-essential industry faces some degree of the same impact. Nobody who loses their job or sees their business run into serious difficulty decides that now's a good time to renovate the kitchen and buy a new car for example.

I have no crystal ball, I could well be wrong, but given the scale of impact it seems like this is going to take a very long time to recover from.

Take the 1991 recession for example. It might have ended in 1991 but it was still very much doom and gloom several years later in the real economy. The recession was still a major factor in politics 5 years later and it wasn't until about 1998 when there was widespread confidence once again.

The ASX spent a full decade getting back to 1987 levels and more recently it took 12 years to regain the 2007 high. For that matter the high of January 1970 wasn't reached again until September 1979 and the 1937 high wasn't regained until 1945 and the 1951 high wasn't seen again until 1958 so there's plenty of examples of the market taking close to a decade to recover.

So to the extent that anyone's pessimistic, they're really only looking at the past and noting that other such hiccups took quite some time to recover from and are assuming this one will be at least as bad given the severity of the downturn.

I do acknowledge of course that I could be completely wrong. All I'm doing here is comparing to past market tops and recessions and noting that they all took many years to resolve and assuming that this one would do much the same. That's no guarantee....

 

[OmegaTrader]

According to a previous post (#309), GDP loss in 1929 was 26%.

Various estimates already put GDP loss in 2020 at a comparable order of magnitude. Goldman Sachs says 24%, others have differing figures but nobody's saying 1% or 2%, we're looking a big number most certainly.

A particular difficulty is that when this all ends, when the lockdowns are lifted, two basic problems arise:

1. Many businesses will likely have failed given a significant period of zero income meanwhile costs continue to be unavoidably incurred.

2. A large portion of consumers have lost money either due to financial market declines, loss of paid employment or loss of business profits.

3. Governments will have truly astounding debt levels. That's going to have an impact somehow.

End result is that consumers have less money to spend and less to spend it on. There's the ongoing GDP drop which will take quite some time to recover from.

Even if someone could fly from Melbourne to London on the 1st of October 2020, there's not going to be too many people who have any interest in doing so unless the flights and accommodation are stupidly cheap. Most are going to be trying to restore their own investment balances, businesses or employment at that point, they're not going to be spending on non-essentials like major holidays indeed may workers won't have any leave available anyway.

Now consider that every other non-essential industry faces some degree of the same impact. Nobody who loses their job or sees their business run into serious difficulty decides that now's a good time to renovate the kitchen and buy a new car for example.

I have no crystal ball, I could well be wrong, but given the scale of impact it seems like this is going to take a very long time to recover from.

Take the 1991 recession for example. It might have ended in 1991 but it was still very much doom and gloom several years later in the real economy. The recession was still a major factor in politics 5 years later and it wasn't until about 1998 when there was widespread confidence once again.

The ASX spent a full decade getting back to 1987 levels and more recently it took 12 years to regain the 2007 high. For that matter the high of January 1970 wasn't reached again until September 1979 and the 1937 high wasn't regained until 1945 and the 1951 high wasn't seen again until 1958 so there's plenty of examples of the market taking close to a decade to recover.

So to the extent that anyone's pessimistic, they're really only looking at the past and noting that other such hiccups took quite some time to recover from and are assuming this one will be at least as bad given the severity of the downturn.

I do acknowledge of course that I could be completely wrong. All I'm doing here is comparing to past market tops and recessions and noting that they all took many years to resolve and assuming that this one would do much the same. That's no guarantee....

This is the political choice don't rack up debt ,let the economy fail and have 25% unemployment or rack up the debt and create a future crisis down the road.

I think the mantra of whatever it takes will take hold.

The only way I see 1929 is if the gov is overwhelmed and the real economy effects leak into the credit market, especially the housing market, sending the banks under etc.

Can the gov spend 24% gdp to offset the big drop ? Is the political will there?
Aus debt to gdp is approx 40%,the gov can run the entire economy for 1.6 years/160% debt increase if they choose too.
All will be bought by the RBA.

A simplified example,
Say the effect is negative gdp growth 25% each year for 2 years. Why cant the gov just spend 25% of gdp each year by debt.

For the problems
1)Stopping business failing the second stimulus is a current example

2) Unemployment and gov programs can offset some consumer loses

3) Like the US deficit "This is not the time to worry about the deficit" US treasury Secretary Steven Mnuchin

I agree that there will be pain .It will take time to come back,confidence is fickle and unpredictable.

I think the way I frame it is, do the animal spirits and liquidity stress of forced sellers push the market low enough to create a bargain for what you are really buying. You are really buying earnings in perpetuity. Some companies go under, some do well. But earnings for price is the fundamental game. The Chart and sentiment/news are other games.

My two cents on the recent price is that alot of participants were long at 4800 mark as the support from the past charts show. The news will probably overwhelm them next week and some will have to spew up further driving falls. I don't know what fundamental participants are thinking but they will sure be thinking that revenues falling will drop value and panic is still there to drop price, unless there is some kind of deep value play known inside out.
The sentiment is still overwhelmingly bad right now, I don't know how to quantify that is really just a subjective opinion.


What is a bargain if you think that earnings will recover eventually
PE 10? At PE 5 it would be a bargain of the century literally.

Right now say PE 15 , that is assuming earnings stay the same, that is 6.66% return with all of the downside risk. How can that be a good fundamental return? It could be a trade but not a good investment in my opinion.

I would be interested in some fundamental investors explaining what they are thinking right now?

 

[aus_trader]

All I can say is, Earnings can be revised down. So what is a bargain right now (based on historical Earnings) may not be a bargain if the Earnings are revised down in the near future.

 

[pozindustrial]

Old dude here playing with super funds. Was skittish last year moving between investments, bonds and cash. Got lucky holding cash when the market dropped and put 50% in on March 18. I had recognised that in past recessions there seemed to be two drops, one low after 2wks (3wks this time) and another after 2 mths I believe for psychological reasons. So I have my fingers crossed for another low in 4 wks.

 

[Dona Ferentes]

another day, and down again, though some tentative but not convincing recovery from the initial sell-off. The close was orderly

 

[Craton]

FWIW
With the All Ords etc repeatedly cracking new highs (was it really only in Feb?) against relatively low growth, consumer sentiment and the growing COVID threat, IMHO the writing was on the wall for a tanking in the markets. I managed to bail out of or reduce stocks around the peak so have plenty of dry powder to fire off. Without a bottom in sight though, those triggers are fairly locked down much like our state borders are becoming.
The extent of the sell off/bear market remains to be seen with all eyes on how much the virus impacts the rest of the globe in the coming days, weeks, months. Although like I always do anyway, will continue to add to the long term, divvy payers I hold.

 

[Smurf1976]

another day, and down again

That the market has gone straight through prior lows and other logical support points without even flinching is what's most alarming. The left hand side of the chart and any analysis based on it may as well not exist at the moment it seems.

 

[Smurf1976]

I note that for the US markets, total market cap / GDP reached an extreme just prior to the crash and that to get back to something that would be a plausible low would require at least a 50% decline and that's without any contraction in GDP.

If the forecasts of a circa 20% GDP drop are correct (Goldman Sachs is forecasting 24% for the US, others seem broadly similar) then that would require a minimum 60% nominal fall from the peak. So somewhere around 1350 for the S&P 500.

Looking at this, and considering what's going on in the real economy, the market would seem to still be far too high for this to be a major bottom. A temporary bottom from which a rally commences perhaps, but not the ultimate low.

Note this is referring to the US marker but much the same for Australia:

 

[hja]

Still looking for pasta out there....



But am long lettuce (iceberg) - saw it for $8.10

 

[InsvestoBoy]

Note this is referring to the US marker but much the same for Australia:

Not the same for Australia, please post supporting data.

Most recent GDP figures for Q4 2019 put annual GDP at $1,994,874,000,000.

The most recent total market cap figure on the ASX from Feb is $2,026,292,000,000.

Assume Q4 2019 GDP number will be steady for Q1 2020 (let's say we grew in Jan+Feb and wiped out in Mar because of slow Gov response).

That puts TMC/GDP in Feb at 101%

All Ordinaries, as a crude proxy for TMC has declined 29.4% since end of Feb.

That puts TMC/GDP currently at 75%.

Now the TMC number comes from the ASX and assumed to be reliable. GDP comes from ABS but RBA also has their own copy of the data. So the "TMC/GDP" value depends a lot on how you calculate GDP. I used sum of last four quarters of "Gross national income: Current prices" numbers from the ABS to calculate above, but they themselves use "Gross domestic product GDP, Chain volume measures - Annual" which is slightly different. I notice you posted GuruFocus chart, they seem to use a different number for both GDP and TMC (WorldBank) which makes the chart look different.

My chart (up to Q4 2019)


GuruFocus, imputed to current using ASX300:


Some disagreement there about numbers, that is fine, the point is that neither shows valuations as measured by TMC/GDP to be "much the same for Australia", in fact both would show the current price as cheaper (by this valuation metric) than both GFC lows and tech bust lows.

That, of course, is based on the assumption of Q1 2020 GDP being flat against Q4 2019 GDP. GDP is notoriously revised a lot over the years so make of that assumption what you will, maybe all of 2019 GDP numbers will get revised lower over time.

Siblis Research purports to carry Shiller CAPE ratio for many countries. I don't have access to their private dataset but you can see a 5 year sample on their site: https://siblisresearch.com/data/cape-ratios-by-country/

The most recent reading they have up there is from June 2019 is a CAPE ratio of 17.94. You can imagine two Q of earnings data falling off the back of that series and two Q of earnings being added to the front since then. Probably since then the denominator hasn't changed all that much. If we impute a 34% decline in the All Ordinaries since end of June 2019, and assuming the cyclically adjusted earnings denominator is unchanged, we could say the CAPE might be something like 11.

Star Capital, a German fundie, tracks CAPE ratios (and other valuation metrics) for MSCI indexes. https://www.starcapital.de/en/research/stock-market-valuation/
For MSCI Australia they have the CAPE as 18.6 as of 28.02.2020. Now MSCI Australia index AFAIK is something akin to the ASX100, so only the top of end of town really and this will be using whatever is the latest earnings data provided by MSCI probably. But as another proxy we can check it. If we impute a 24% decline in the ASX:VLC ETF since the end of Feb, we could say the CAPE might be something like 14.

Compare this with the US:
- CAPE is approximately 20
- TMC/GDP approximately 100%

Not saying that Australia is cheap or US is expensive (see discussion here for that https://www.aussiestockforums.com/threads/market-bottoms.35299/#post-1062915 ) but only disagreeing with "much the same for Australia".

CC @kid hustlr