The reporting season of horror begins

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14.04.2020 – Special Report. Wall Street has put on a nice bear market rally for Easter. Bold stimulus from the US government and fresh money from the Fed had supported the prices. Much will now depend on the reporting season, which begins today with JPMorgan Chase: The question is whether the probably horrendous figures and the probably clouded outlook will support the more optimistic stock market valuation. Unfortunately, however, things will be particularly difficult this time: Uncertainty is likely to bring about a new provisioning rule in banks’ accounting.

Bear-Market-Rally

What a rebound: At Easter, the Dow Jones, with just under 24,000 points, almost exactly marked a 50-percent recovery from its fall from Olympus at around 29,600 points to Hades at around 18,600 points. Yesterday’s setback on Easter Monday was also due to the question of whether the company figures justify this catch-up. As of today we will get the answer. The blog ZeroHedge warned that stocks in the S&P 500 have been more overvalued recently than at the February high. The NTM in the chart stands for “next twelve months”.

sp500ntm

Horrible company figures expected

Much will now depend on the start of the reporting season. The fact that the figures and outlook are poor is considered to be a foregone conclusion. Not only in the USA, but also in Germany. Analysts at DZ Bank, for example, suspect that the profits of the 30 DAX-listed companies could collapse by 50 percent or more this year – and in some cases they could fall by up to 80 percent. This would be far more than in previous recessions, “when profits fell by an average of 35 percent.” This means that lower prices than today are always possible.
But exactly how bad will the year be? And how bad the coming year? Is the future valuation of the stock market justified in view of the horrendous figures to be expected? We will get an initial answer today before the start of trading on Wall Street with JP Morgan Chase. Shortly afterwards, heavyweights such as Wells Fargo, Johnson&Johnson, Goldman Sachs, Bank of America and Citigroup will follow.

Puzzling with new balance sheets

The corona scare is compounded by another uncertainty factor for the stock market: according to Reuters, banks must form provisions for the future as a precautionary measure in accordance with the new accounting rules in force since January 1. This rule is now being applied in the first corona quarter of all quarters. So look out for the term CECL, which stands for Current Expected Credit Losses, in regular market updates – some brokers will also speak of “Cecil”.
Unfortunately, with this arbitrary rule it is completely unclear whether a credit institution is sitting on nothing but bad loans or whether it is just being particularly careful. The question of all questions is: How many loans will burst at which bank because of Corona? Gerard Cassidy, an analyst at RBC, said investors wanted reassurance that “this downturn for the banks will only be an earnings issue and not a balance sheet issue similar to the 2008-2009 financial crisis. Last week, Goldman took the precaution of lowering all banks’ earnings estimates for 2020 by 40 percent. This could be the benchmark for shock or relief in the market.
And so the guesswork will begin about how deep the recession has dug its way into the mortgage market, into companies’ businesses and into the property market – with potential consequences for the stock market.

Goldman is now bullish

Nevertheless, Goldman Sachs made an interesting bullish reversal. Analyst David Kostin just wrote that the combination of unprecedented political support and the flattening of the virus curve has dramatically reduced the downside risk to the US economy and financial markets. The earlier short-term target of 2,000 points in the S&P 500 is no longer likely, the year-end target remains 3,000 points. For Goldman, the figures from the first quarter will hardly have any impact on the stock market – most customers would have already ticked off in 2020 anyway. The focus is on the outlook for 2021, but there is a risk: a second wave of infection in the US as soon as the economy starts to recover.

Don‘t fight the Fed

There is, of course, one stabilizing factor: the Fed is standing by. Last week it pushed the market up with the announcement of further emergency aid worth $2.3 trillion. The new package of measures is designed to support local governments and small and medium-sized businesses. Among other things, four-year loans will be made available through commercial banks for companies with up to 10,000 employees. In addition, the Fed wants to buy bonds from states and populous counties and cities to help them with fresh cash. On the trading floor in New York it is a foregone conclusion that the Fed will not allow another stock market crash.
Eric Peters, Chief Investment Officer of One River Asset Management, agrees: “Without the aid programs of the Fed and the US Treasury, which were implemented at breathtaking speed, share prices would probably be 50 to 80 percent lower. But then he warned that unemployment of 15 to 25 percent, deficits and debts as in the Second World War – and, according to doctors, perhaps 100,000 to 240,000 dead in the USA – are now threatening.

„Do or Die“ in the matter of medicine

In general, the question of all questions for the stock market is a medical one: Will there soon be a vaccine? Or will people develop resistance? These would be the bullish scenarios with which we could soon put the corona crisis behind us. Or will people who have once fallen ill be so weakened by the raging corona virus that their health is severely damaged? Even worse: is it possible that after Covid-19 has healed, a new illness is possible, as currently seems to be the case in South Korea with 91 officially recovered patients? That would be the bearish cases that could send the market to the wall once again.

One note remains as a conclusion from our side: If medicine defeats the virus, not only shares should gain in value in this gigantic inflation of the financial market. Not only the USA, but also Europe and China have launched economic and credit programmes. The main beneficiary should be gold, which most recently started out at over $ 1,700 an ounce and reached an all-time high of around $ 1,900 an ounce.
The Bernstein Bank wishes us all a quick return to normality – and you successful trades and investments!


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