I am not following the math. How did you come up with best case scenario as the market adjusting 15-20%?
Oh, sorry, my bad. The missing variable is the leverage assumption, ie whats 1% of GDP worth in terms of stock market return. I am on a mobile so I can’t look it up but I recall it being around 5x (feels about right for the US at least - average equity return is 9-10%, average growth is about 2%). So if we assume that growth goes from 2.5 to -0.5 that gives you 15%. like all macro estimates, it could vary wildly but it’s good enough for back of the envelope answer to “how bad is this shit?”
Ok, let's analyze one factor at a time. You are assuming negative growth for all of 2020 as the best case scenario? This is more like the worst case scenario.
%% Markets down?? QQQ + DIA are UP on weekly charts. QQQ is also nicely above 200dma. NOT a prediction=trend comment...……………………………………………………………………………………...
Sure. For the mild case, I assume that the epidemic stops in China and there are only economic effects to consider (ie no panic). Given the extent of the shutdowns, I am assuming negative growth in China for the rest of the year and translating that to a flat to mildly negative (basis points, not percent) growth globally. That’s not a bad assumption, considering how interconnected everything is. In my non-expert opinion something like that is very likely at this stage, especially considering the market/public panic and games around the energy markets. For the worst case, I am assuming that other developed economies will institute similar countermeasures to what China did. That could be a very bad situation but I think it’s not very likely.
News out of opec and more cases of the virus will send equities down another 3-5% tomorrow. Volatility could possibly jump to 100+ something that is extremely and extraordinary rare!!!
Btw, JPM issued a research note that was giving probability of recession based on the recent returns of different assets: 5 year note ~90% SPX ~50% Base metals ~60% IG credit ~40% HY credit ~30%
Right, VIX broke 50 friday, keeping a close eye on it for UVXY trades, plus TVIX small size daytrading... gotta love this volatility
You can use gordon growth formula Price = D1/ (r-g) where D1 is next year dividends and r is cost of capital or reqd rate of return and g = growth rate Rearrange return = yield + growth In reality, you have to take into change of valuation (multiple expansion or contraction) also, so return = yield + growth + change in valuation Current estimated numbers was $175 dividends for SP for next year, keep other things constant and neglect change in valuation for this exercise When S&P was 3300 Return = 175/ 3300 + 2.5% (growth rate), = 7.8% Now we are expecting 0.5% slower from the above post, so new price assuming same returns 7.8% = 175/ new price + 2.0% So new price = 3017 All these are calculations are very sensitive to growth rate. Change in valuation should also more downward pressure since the current valuation is way above trend
Everything at this point is based on many unknowns to baseline assumptions. The closest hard data is from China with 100k cases. Are people seeing China going into a recession? Did you also account for a 1% decrease in interest rate in your assumption? Reality is that at this point, no one could tell 100% how wide spread and bad CV will be in the US. It's too early to have any indication.