The bottom is in... ?

17 mar 2020

Technically it is interesting that this recent selloff has come down to test the 2018 lows and has so far held. The level also matches with an inflection point back in 2017. Is this the bottom though?

Let's ask a different question. Is everything priced in? The stock market is a gauge of perception about the economy going forward and the accepted metric for the economy is Gross Domestic Product (GDP). Going on at least one opinion (because that's what it is) Goldman Sachs released the estimates of their economists that Q1 2020 GDP will expand 0% followed by Q2 contracting -5% because of the economic drawdown from Coronavirus. These will be followed by a rebounds in the 3rd and 4th Quarter to bring the year's GDP growth to just 1%. Estimating growth at all is a rather bullish outlook when you consider it.

Let's just go with Goldman's estimates for what this next quarter will do to the economy. The prior years' GDP growths of 2018 and 2019 were 2.86% and 2.3% respectively. So with a sudden 5% contraction we can roughly say that the US economy is puking up 2 years of economic growth. That would theoretically put us back at a valuation from 2 years ago where the SPX was trading around 2750; a 9.6% difference from as of writing. Somewhere in the range of unknowns it is possible that the losses the economy will actually sustain are now priced in at up to 10% below the theoretical fallout.

A trader has to make a bet and so long as any new shocks do not enter the market I think we've seen the end of the selloff and now it is a matter of returning to the mean.

I've had a few spirited debates with highly intelligent people that seem convinced that "this is it" and all the Fed's money printer going 'brrrrrrrr' is coming home to roost. I'm just don't think "this is it." What we have here is a unique and critically impacting Black Swan event but nothing fundamentally about the monetary system or real world assets has been put in jeopardy. A pandemic, while dangerous, is not particularly deadly among most demographic and does not impact financial system liquidity. Businesses may lay off workers due to reduced economic activity but the buildings are still standing and inventoried goods will eventually be sold. In fact this unique mass hysteria has actually caused a great deal of excess consumption as people stock up for "the apocalypse that is nigh."

So stay well, wash your hands, make sure to design at home workouts to stay fit, and trade while keeping your head!