“Investors have rightly overlooked the dismal economic data released in recent weeks,” says Jon Sindreu in The Wall Street Journal. It’s been impossible to determine how bad this recession is likely to be, since – unlike the global financial crisis of 2007-2009 – it’s entirely due to factors outside the economy. So once the “widespread panic” of the “fastest bear market in history” had run its course, investors have mostly just tried to price in the direct impact of the shutdowns. That’s been bad news for airlines – down 65% in the US this year – but good for technology companies that benefit from the rise in online shopping and remote working.
“Now, though, the news is starting to become more meaningful.” A growing number of firms, such as vehicle manufacturers Caterpillar and Polaris, say that they will not reopen some of their factories. That’s worrying for employment, for the economy and for the stockmarket rally. After all, the start of this crisis was unusual. Bear markets don’t usually kick off with such a rapid drop; instead, we see “a trickle of losses” as deterioration in economic data and corporate profits becomes evident. We may still be at the start of that process. “A drip, drip, drip of bad news isn’t a good prospect for stocks.”
Dividends set for the chop
That bad news looks almost certain to include drastic cuts in dividends. Almost $500bn in payments to shareholders may be at risk as firms “scramble to protect balance sheets from the economic damage caused by the pandemic”, says Daniel Thomas in the Financial Times. The absolute best-case scenario for this year is that global dividends fall by 15%, according to estimates this week from fund manager Janus Henderson. That includes only firms that have already cut or are likely to do so very soon. A bleaker scenario would see payouts fall by 35%. Futures markets are pricing this in to some extent, adds The Economist; for example, these indicate that S&P 500 dividends are likely to be more than 15% lower than expected at the start of the year. “The bouncy stockmarket – not so much.”
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Less optimism in Europe
Still, the surprising strength of the market is most evident in the US, notes Ksenia Galouchko on Bloomberg. The S&P 500 is up by 30% since its March lows; the Stoxx Europe 600 by around 18%. And valuations for European stocks are near record lows relative to US ones: the price/book (p/b) ratio for the Stoxx Europe 600 is less than half the p/b of the S&P 500.
There are good reasons for Europe to be somewhat cheaper than the US: tensions between EU members, tepid earnings growth and a greater weight in cyclical sectors. Nonetheless, investors seem exceptionally bearish on the region: they have pulled $28bn out of European stock funds this year. If the news over the next few months is better than feared – ie, “the global economy sees a quick V-shaped recovery once businesses are able to reopen and consumers resume spending” – its very low valuations and unloved status mean Europe could benefit more than the US.
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