By Tom Burnett, CFA
In a March 10, 2020, Wall Street Journal Opinion letter, former Federal Reserve member and current Princeton University professor Alan S. Blinder indicated that he is ‘90% sure’ that the U. S. economy will enter a recession (defined as two consecutive quarters of negative GDP growth) this year. He repeated his prediction on a CNBC interview thereafter. Blinder sees the growing impact of the Coronavirus outbreak as a large negative for consumer spending. The consumer accounts for about 70% of U. S. GDP so any prolonged consumer weakness will put pressure on the overall economy. Already, such industries as airlines, hotels, cruise lines and general transportation have reported material customer slowdowns. In addition, historically low interest rates have clouded the prospects for the banking industry and reduced the industry’s willingness to loan at the prospects of such low returns. In addition, the OPEC supply price war conducted by Russia and Saudi Arabia has crushed energy prices and greatly endangered employment in the energy sector.
Strangely, these negative developments have not yet altered the general analyst consensus earnings estimates. Looking at the latest FACTSET summaries from March 6, 2020, the forecast for S/P 500 Index companies remains positive for 2020 and 2021. Specifically, the forecast sees 2020 earnings increasing by 7.3% and 2021 earnings growing by another 11.4%. Most observers now expect those earnings growth figures to be revised sharply downward. The stock market certainly is looking for weaker earnings with bank, energy and transport stocks down 30 to 50% from their high levels, depending on the specific stock. No investor can determine the exact bottom of a market decline, but we do see a lot of bad news already priced into the market even if the economy does experience a recession this year.
Tom Burnett, CFA is Director of Research