2008 models which were used by investment banks during the then financial crisis is back in the works. Investment banks are dusting off those models to gauge the right time to jump back in the stock markets which has fallen by 30% from their record highs in February.
The Wuhan coronavirus crisis has ravaged markets across the globe.
Given that the Chinese virus is still spreading across Europe and the United States, gauging that inflection point is harder said than done.
The U.S. government’s $2 trillion fiscal stimulus, along with strategic unprecedented measures adopted by the U.S. Federal Reserve and other central banks on Tuesday have triggered one of the sharpest global equity market rallies in decades.
Bill Ackman, a veteran investor told investors of his Pershing fund that he had turned increasingly positive on stocks and credit, and taken off hedges he put in place in early March when markets first started cratering.
Pershing was “redeploying our capital in companies we love at bargain prices that are built to withstand this crisis”, said Ackman.
Goldman Sachs also held similar views. It said, this this week’s record stock market rally had been led by “underweight” sectors, thus suggesting that many hedge funds had been covering short positions.
Energy, travel and auto stocks were Tuesday’s biggest gainers.
According to Andrew Sheets of Morgan Stanley, head of cross-asset strategy, in such situations, including during the 2007-2009 financial crisis, markets often trough well before the crisis actually ends.
After the 2008 trough, there followed a decade of stunning gains that added more than $25 trillion to global equity value.
“(The market) won’t need to see a peak in U.S. (Covid) cases, it just needs to see some confirmation of the path and it needs to be happy with the path,” said Sheets.
According to JPMorgan, there is more than one way of measuring it, given the unique nature of the crisis which hit the real economy first, with financial markets following.
One model suggested now for re-entry, is a quarter before the recession is likely to end, said John Normand, JPM’s head of cross-asset strategy. He holds the view that the Wuhan coronavirus-induced recession will be “undoubtedly deep but also possibly the shortest-ever.”
Another valuation-based model triggers a “Buy” signal when risk-premium across several asset classes fall to certain “deep value” thresholds.
The last two models have yet to signal a buy, said Norman.
According to Refinitive data, U.S. and European stock valuations based on a 12-month forward price-to-earnings ratios have dipped well below historical averages. Credit markets continue to signal distress signals thereby signalling that many companies will find it hard to service debt. Yields on junk-rated U.S. bonds are around 10% currently compared to 6% a month ago.
Many economists are suggesting that the Wuhan coronavirus-induced recession will have a quick turnaround in global growth by the third quarter.
“We … haven’t fully appreciated how far this recession will go,” said Andrea Cicione, head of strategy at TS Lombard, in London while adding, rising unemployment and deep cuts to capital expenditures by companies are a matter of concern.
“In the short run, the market is still going to stay very volatile until one of three things happens – either the number of deaths and the number of new infections in the U.S., peak, there is some kind of a cure or vaccine developed or until the U.S. economy begins to reopen,” said Randy Watts, chief investment strategist at William O’Neill+Co in reference to the trajectory of the coronavirus and its economic fallout in determining the market’s path.