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In its respected and widely-read Heard On The Street column today, the Wall Street Journal points out that the 23% drop in the Dow Jones Industrial average is likely not the bottom of the downturn. The column points out that the St. Louis Federal Reserve Bank estimates that 52.8 million Americans will be out of work next quarter--a Depression-like 32% of the American workforce.
The article continues: "Even presuming that 90% of the workers furloughed return to their previous jobs in a few months at previous salaries and that the businesses they work for resume exactly their previous health, that would leave an unemployment rate of something like 6% based on the size of the labor force now. That level of unemployment was last seen in mid-2014, when the S&P 500 was struggling to break north of 2000. And even in the best recovery scenario, there is little discussion about long-term impact on confidence and consumption. Research suggests that even after relatively short bouts of unemployment, workers keep their consumption lower to rebuild financial buffers eroded during their joblessness. We still know uncomfortably little about the virus and, more important, about the efficacy of the various methods employed to halt its spread. But most scenarios look worse than the one markets appear to be anticipating. Secondary outbreaks in regions that appear to be past the worst, or even to have defeated the epidemic, are a grim possibility."
WSJ builds its case by pointing out that, at its current level, the overall Price/Earnings ratio is 14.4 times forward earnings estimates, about on par with the historical average--and nowhere near the lows of the Great Recession when the overall P/E was closer to 10.
The article concludes "It is hard to escape the conclusion that, especially in the equity market, current pricing still reflects an optimistic take on the range of economic and public-health outcomes."
One more note of comparison: at its peak during the Great Recession of 2007-2009, the unemployment rate in the USA was 10.0%. If the St. Louis Fed is correct, this downturn will no longer be measured against what happened in the last decade.
The article continues: "Even presuming that 90% of the workers furloughed return to their previous jobs in a few months at previous salaries and that the businesses they work for resume exactly their previous health, that would leave an unemployment rate of something like 6% based on the size of the labor force now. That level of unemployment was last seen in mid-2014, when the S&P 500 was struggling to break north of 2000. And even in the best recovery scenario, there is little discussion about long-term impact on confidence and consumption. Research suggests that even after relatively short bouts of unemployment, workers keep their consumption lower to rebuild financial buffers eroded during their joblessness. We still know uncomfortably little about the virus and, more important, about the efficacy of the various methods employed to halt its spread. But most scenarios look worse than the one markets appear to be anticipating. Secondary outbreaks in regions that appear to be past the worst, or even to have defeated the epidemic, are a grim possibility."
WSJ builds its case by pointing out that, at its current level, the overall Price/Earnings ratio is 14.4 times forward earnings estimates, about on par with the historical average--and nowhere near the lows of the Great Recession when the overall P/E was closer to 10.
The article concludes "It is hard to escape the conclusion that, especially in the equity market, current pricing still reflects an optimistic take on the range of economic and public-health outcomes."
One more note of comparison: at its peak during the Great Recession of 2007-2009, the unemployment rate in the USA was 10.0%. If the St. Louis Fed is correct, this downturn will no longer be measured against what happened in the last decade.
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