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…In this article I will:
- explain why it’s highly likely that, after the current bear market rally runs its course (likely within the next few days), U.S. equities will reverse to the downside and initiate a second major leg down in…the value of the S&P 500 index…[to] far beneath the lows established on Friday, March 20…
- explain why the current and forthcoming economic crisis and recession is likely to be significantly more severe than any other economic crisis and/or recession since the Great Depression and
- [project that]…the S&P 500 index…[will] establish a bottom somewhere in the range of 1876 to 1463… @A Financial Site For Sore Eyes & Inquisitive Minds
My projection is based on a number of factors, namely:]
1. Peak loss of output. It’s now generally accepted by economists that U.S. GDP will contract by an annualized rate of somewhere between 15% and 25% in the second quarter of 2020 (some economists have estimated that the contraction in 2Q 2020 could be as severe as -50%). This would represent the greatest quarterly contraction in U.S. economic history.
2. Cumulative loss of output. Even though the U.S. economy may resume quarterly sequential economic growth in the third quarter, the U.S. economy will most likely remain in deep contraction mode on a year-over-year basis (i.e. relative to the same period in 2019) for all of 2020. This is due to the fact that social distancing will continue to be practiced (mandated and/or voluntary) – to a lesser or greater degree – for 12-18 months (or until a vaccine and/or cure for COVID-19 is widely available), thereby devastating large parts of the U.S. economy during this time. For example, restaurants, sporting events, air travel, concerts, conventions, shopping malls and tourism will be devastated (relative to 2019 levels) for as long as social distancing is being practiced. In this context, it can be estimated with confidence that the cumulative loss of output associated with the forthcoming recession, relative to the baseline level of output (in this case 2019), will be by far the most severe since the Great Depression. No other recession since 1929 comes even close.
3. Peak unemployment. Peak unemployment is likely to surpass 20% and could be substantially higher. This is a higher rate of peak unemployment than any US economic crisis since the Great Depression.
4. Cumulative loss of hours of production. The cumulative loss of productive labor associated with the forthcoming recession will surpass any such losses since the Great Depression. No other recession other than the Great Depression produced a loss of labor hours that is even close, by comparison.
5. Massive financial crisis. The forthcoming financial crisis will make the Financial Crisis of 2007-2009 look like child’s play. No financial crisis since the Great Depression will be remotely comparable to the one which will be experienced in the coming months and years. The financial crisis of 2007-2009 – which had been the most severe financial crisis since the Great Depression – was mainly caused by defaults in just one segment of the credit market, namely residential mortgages. The forthcoming financial crisis will involve massive defaults on debt obligations from virtually every single industry in the US economy. Furthermore, massive defaults on commercial leases will have a devastating impact on the highly leveraged real estate sector and the financial entities that finance them. In the course of the forthcoming financial crisis, the common equity shares of many banks and financial companies will become worthless, while virtually all common equity shareholders of financial companies that provide credit will be subject to massive dilution in forthcoming restructurings and recapitalizations.
6. Loss of wealth. The aggregate intrinsic value of common equity shares in the U.S. economy will suffer a precipitous plunge. Many companies will face bankruptcy and the value of common equity shares for most of these companies will go to zero and, in the case of most companies that manage to escape bankruptcy, most common shareholders (public or private) will face drastic reduction in the intrinsic value of their shares due to a combination of increased debt (raised to cover losses) and shareholder dilution via re-capitalizations. Furthermore, valuation multiples based on earnings or other fundamental metrics will collapse due to the application of lower long-term growth rates and higher discount rates (i.e. higher risk premiums).
In summary. The severity of the current and forthcoming economic crisis and recession will be far greater than that of any since the Great Depression and, therefore, it’s reasonable to infer that the bear market associated with the current and forthcoming economic crisis will be more severe than any bear market since the Great Depression…
My current expectation is that:
- the U.S. equity market will establish an intermediate trough sometime in the next two months…[but] if effective epidemiological, economic and financial solutions cannot be devised and implemented by August of 2020 (or market participants expect that solutions will not be forthcoming), I expect the current bear market to…ultimately become significantly more severe than those of the 2007-2009 bear market…
- and that, in such a scenario, I would expect the S&P 500 to ultimately reach a trough below 1000.
- However, my “base case” currently assumes that effective epidemiological, economic and financial solutions can be put in place by August 2020…[and, as such,] I would expect the current bear market cycle…[to] trough…between 1876 and 1464. This implies a minimum decline of 26% relative to Friday’s closing value on the S&P 500 index. However, it should be noted that, for reasons described above, this scenario can arguably be considered to be somewhat optimistic….
- Investors urgently need to implement a portfolio strategy which is designed to effectively deal with the forthcoming economic crisis and the associated severe or extremely severe bear market and
- investors…[need to clearly] understand the severity of the forthcoming economic and financial crisis and that “this time is different”…[or] suffer tremendous losses of wealth and income…
- investors must devise their portfolio strategy plan quickly and decisively, because the second leg of the current bear market is soon at hand…
It is critically important that you have the right portfolio strategy to deal with the current unprecedented economic and financial crisis.