Analyses on the direction of the stock market and economy in 2020, and stock picks

[Liquidity]

There’s a lot of good discussion here on the Inderes forum, but I’d personally like to see “calmer” and more in-depth discussion on the direction of the markets, based on proper analysis and data. Messages get lost in those “monitoring threads”.

The S&P peaked on February 19th: 3393.
The “bottom” was reached a month later on March 23rd: 2192.
So, the decline was 35%.

The decline was historically fast, and during the fall, the VIX set records, and we were in a very oversold state at the bottom. On the worst days, the drop was probably over 10%.
From this turmoil, we then rose about 19% in about 6 days towards the end of March.

At this point, it’s good to look at what bear markets typically look like.

It’s good to note that they often include several long upward movements, after which the decline continues.

The bear market that began in '29:

A bit more recent from the dot-com bubble:

And then this latest one:

This time, of course, many things are different. History rarely repeats itself perfectly.

The market decline was unprecedentedly steep. This was because the economy faced an external shock whose inevitable progression everyone could see in real-time.

Can the recovery be as steep - and fast? This is probably the question of hundreds of thousands for many private investors as well. The key is how much “permanent” damage will be done to the economy and consumers.

It seems that unemployment will rise high due to these few months of quarantine measures. High unemployment will prolong the recovery, as the return to growth in terms of recruitment is typically cautious and slow.

The world may be facing an “unprecedented” recession - global GDP is estimated to fall for the first time since World War II (if I remember correctly).

On the positive side, at least the following can be stated:

• rapid and at times proactive response from central banks and governments (“whatever it takes”)
• perhaps the virus can be brought under control quickly

However, it seems to me that the worst has already happened, meaning that rising unemployment will cause a big dent in the economy, which means a slow recovery even if societies can be opened quickly.

All this likely means that we have only seen the first act of the bear market, and in the following acts, the focus will shift more and more away from the virus and towards the recession itself. More help from central banks may still be needed.

On the other hand, stock markets recovered relatively quickly from the financial crisis:

However, this blow to the economy is greater. Here are some recent comments from BofA that caught my eye:

Then there’s the fact that Trump will do everything he can to make the stock markets (and the economy) rise before the elections. Anything could be possible.

What does this mean for investors?

What are your thoughts, everyone?

[Framtidens_kaffepeng]

@Liquidity

the worst will already have happened, meaning high unemployment will cause a big dent in the economy, which means a slow recovery even if societies could be opened quickly.

Here are a few thoughts on this “recovery” to normal:

1. Companies will use layoffs and redundancies to streamline their operations and cut “fat,” regardless of the sector.

2. A recession/depression will cause suffering for consumers, who will only keep their wallets open for essential spending. Add to this extremely high debt, and the cocktail looks undrinkable in the short term. It will take time for consumers to recover from this shock.

3. When consumers are on the ropes, companies won’t rush to rehire laid-off staff until the outlook clarifies. The need for hiring only arises from a clear expectation of profit; no company hires just for fun.

4. In this turmoil, many companies will be permanently wounded, and bankruptcies will be seen here and there. With the companies, jobs will also disappear. There’s a small positive nuance here, as some sectors might have clearly good labor available, and new companies will rise to replace the old ones.

Based on this, stock prices cannot be predicted in any way, but I think (I don’t know) that at some point Mr. Market will start pricing in a prolonged recession/downturn. In volatile times, it might be best to buy an index (this is what I do myself), and of course, in such a bouncy market, one can find cheap stock bargains – and best of all, now is definitely not the worst time to start investing.

[Moops]

There’s a lot to chew on in Mikko Mäkinen’s article.

Katsaus ensimmäiseen neljännekseen ja tulevaisuuteen

I also started following the University of Helsinki’s Open University online course on economic crises to deepen my own understanding.

Avoin verkkokurssi talouskriiseistä: Nyt on toisin, mutta miten? | Helsingin...

Personally, I’m now forced to invest in growing my knowledge, because I wasn’t able to time the sales of my stocks and funds for January/early February. In addition, in mid-February, I assumed that selling would have been too late. In my case, not doing anything might not be a bad thing, because I would have already impatiently invested most of the money back into the stock market. Now, if there’s a longer-term recession, I’ll still have time to diversify my investments with monthly adjustments and benefit from lower purchase prices.

What I remember from the 90s recession and the financial crisis is that the biggest difference now seems to be that governments promised aid packages really quickly. Now it feels like they’re stimulating first and figuring things out later.

Large corporations also seem to be taking responsibility, at least here in the UK. For example, Nissan paused car production until early May. The government will pay 80% of employees’ salaries and Nissan the remaining 20%, meaning employees will receive full pay. I don’t know if this will come out of, for example, dividend payments to investors, but personally, I’d gladly go without a dividend if it secures the rent and loan payment ability of a low-wage employee. This will hopefully prevent personal bankruptcies and family worries, such as an increase in suicides. Having grown up in 90s recessionary Finland, the shadows of those times still haunt my mind.

Coronavirus: Nissan extends Sunderland plant production pause

[Tunturisusi]

I don’t think this can be compared to other stock market crashes because this crash is caused by totally different aspects.

The restrictions on people’s normal work, the functioning of the service sector, and consumption have created a mess that will not be fixed until the restrictions are lifted and the sense of security increases. Restaurant businesses are not dying, and visits to hairdressers/massages are not decreasing, etc. It’s a bit different to look at high unemployment figures in light of the fact that restrictions are making people unemployed… employment will also return when restrictions are eased. It probably won’t return exactly the same, but some will be redirected to new types of jobs. In a way, it’s tragicomic that people’s need to use services hasn’t disappeared, but due to corona, many people’s jobs are now ending, at least temporarily.

[Liquidity]

Let’s start analyzing companies:

Konecranes:

Performance during the financial crisis:

And here are the past few years:

Market capitalization:
Now 1250 MEUR
2009 lows ~620 MEUR.

Revenue:
2019: 3300 MEUR
2008: ~2100 MEUR

Operating profit:
2019: 150 MEUR
2008: 250 MEUR
2009: 120 MEUR (adj.)

Operating profit trend:
2017-2019 average: 145 MEUR
2006-2008 average: 176 MEUR

The share price seems low, but the earnings level is also weaker than before the financial crisis.

Konecranes no longer generates returns on capital in nearly the same way as before. Acquisitions seem to be weighing it down.

In my opinion, it seems there’s a high risk that this will get even cheaper when poor quarterly reports start to emerge. Would the EBIT halve again? 2009 lows seem to have been 5x EBIT.

Those of you who have invested in this, tell me, will it improve its flight? It seems the chosen strategy has been poor. The management has probably also been changed. Many probably think this is cheap. It’s also good to remember that interest rates are low.

[Moops]

An interesting look back at past pandemics and their impact on improving workers’ conditions.

https://www.bloomberg.com/opinion/articles/2020-04-05/when-plagues-pass-labor-gets-the-upper-hand?utm_source=url_link

[Verneri_Pulkkinen]

I shared that original research earlier in the history thread.w

The research is quite nice, but due to its data, it tells more about how the 14th-century economy reacted to a pandemic where a large part of the workforce dies. :o Now, we probably don’t expect the same mortality rate as in the Black Death..

Addition: here are more excerpts from different studies, e.g., how pandemics have affected housing prices.

Investing Through Crises

[Gazza]

I agree, what’s the point of these index curves of previous collapses when every crisis is different, especially this one. Now there’s a shock from outside the economy, and demand will most likely gradually return as soon as the corona crisis is over. Most people are only temporarily on reduced working hours, and unemployment is unlikely to explode after corona. There are no high interest rates now, and people are not forced to sell their homes. There are practically no major layoffs in large companies.

This kind of isolation that Finland is currently experiencing is unlikely to last longer than May; society will have to be opened up after that, with risk groups isolated.

Regarding stocks, I currently see and will likely see an excellent buying opportunity in the coming weeks. It’s hard to say when prices will return to their peak, but if one has the patience to hold purchases, spreading them out over time, even for five years, they will surely make a profit.

[Liquidity]

I didn’t answer that earlier message, but I partially disagree with this. While the cause of the recession certainly matters, recovery is always slow due to the structures of the economy and society. In Finland and, for example, Germany, the layoff system helps, but many countries don’t have this, and re-employing the unemployed simply takes time. The same applies to recessions in general.

[Gazza]

No, I’m not expecting a quick recovery to the previous level, but rather a clear and steadily better tomorrow in Finland starting from June. I believe that restaurants will reopen with certain restrictions, summer sports will start (initially for empty stands), various services will gradually start being used again, etc. Mass events will suffer, for example, amusement parks, which will miss at least half of the summer.

The most important task now is to keep small businesses afloat. Large ones will survive, and the layoffs used by everyone help. I don’t understand why super-recession news gets so much media attention. It’s unnecessary scaremongering.

In the US, most of the unemployed are probably in the service sector. Most will return to the same place just as quickly as they left it.

[beatsby]

A weekend observation, as I had some time to look at stocks and the hit they’ve taken so far in a broader sense. Accounting firms are still trading at high P/E levels of around 30X. A sharp decrease in accounting entries, deferrals of payments and settlements until autumn, frozen consultations with entrepreneurs, postponement of shareholder meetings, etc., are likely to affect short-term outlooks.

[Contrafun]

More forecasts on the direction of the economy. The Bank of Finland has today published an analysis presenting scenarios for the development of the Finnish economy in the coming years.

Skenaarioita Suomen talouden kehityksestä lähivuosina – Euro ja talous

According to the analysis, the coronavirus pandemic will drive the Finnish economy into recession this year, along with the rest of the global economy. The depth of the recession is difficult to assess because the development of the pandemic and its containment measures are difficult to predict.

The Bank of Finland’s forecast describes two possible development paths for the Finnish economy in the coming years.

• Calculation 1: In the coronavirus suppression scenario, strict restrictive measures are assumed to be in force for eight weeks starting from late March.
• Calculation 2: In the scenario aiming to slow the spread of the coronavirus, restrictive measures remain in force until the end of September.
  
  

According to the forecast, the coming weeks are quite crucial. Fortunately, the Finnish government now has better opportunities than before to influence the economic situation. Very good news is that the Helsinki GSE (Helsinki Graduate School of Economics) economic research unit is establishing an economic situation room, which will start operations today, Tuesday. The situation room will provide a more accurate picture of the depth of the crisis and where it hits. At least for the Finnish municipal economy, things look bad now.
https://www.helsinkigse.fi/covid19-data-fi/tilannehuone-aloittaa-data-analyysien-tuottamisen-6-4-alkavalla-viikolla/

[Rushimato]

Now that the situation is stabilizing, what are your views on the market?
I listed some observations here to help me move forward again.

1. States that are bringing the disease under control with testing and lockdown (Denmark, Norway, Germany) are building exit strategies, but a second and third wave when restrictions are lifted cannot be left out of the risk analysis.

2. Borders will likely remain closed for a long time for all non-essential travel, but cargo will continue to flow.
   Air travel will suffer, and for a long time.

3. GDP will fall sharply (and in Finnish, meaning a recession is coming), 300,000 furloughed in Finland. It’s probably reasonable to assume similar results in over half the world’s countries.

4. Bankruptcies, Stockmann as the first candidate from Finland.
   What else will go under, and will it cause systemic symptoms? US housing market, Italian banks?

5. Human encounters, social distancing will remain on the agenda until a vaccine, at least at some level, or until the country can be declared COVID-free.

There’s a lot of bearishness here compared to the mood 3 months ago, but on the other hand, this is not the end of the world, and good companies are still good, some even better.
On the other hand, the industry is also sending a message that “these investment projects won’t be put on hold for half a year of lockdowns; they’ll just be ready conveniently when the recession eases.”
What makes this more difficult is how much to pay for those companies.

With what kind of future outlook have you built your current position, and what choices has it led to? I’m especially interested since people previously had large cash piles, so some decisions must have been made.

Finally, a remark from my friend in late February when the collapse started to seem obvious: “Now begins the time when the foolish are separated from their money”

P.S. I am already betting on a recovery, but defensively, and I realize that I might still end up on the wrong side of the separation, which is why I am ready to change my stance if necessary.