MSCI warned on Thursday that another double-digit drop could be in store for US stocks, Reuters reports.
Like most other analysts, Thomas Verbraken, the executive director for risk management at the research and indices giant, said his risk models suggest that a short-term drop in growth of 2 percentage points, and an attendant drop in corporate earnings, could hammer stocks even lower, erasing much (but not nearly all) of the gains since President Trump’s inauguration.
“We’ve conducted a what-if scenario analysis that assumes a short-term drop in growth of 2 percentage points and a risk-premium increase of 2 percentage points,” Thomas Verbraken, executive director at MSCI’s risk management solutions research told clients.
“Our model indicates that, in such a scenario, there’s room for further short-term losses: U.S. equities — already down 11% from Feb. 19 through March 3 - could drop a further 11%.”
Looking at what it would take to return to the 3 yr average price/sales ratio, -11% looks reasonable for the broad market. The story is a bit different for the sectors;
Can anybody see how completely stupid that report is?
First, it’s crazy enough to assume anyone anywhere can quantify the impact of this given that so much remains unknown.
But even crazier . . . 11%!!! If they’re going to pul;l a report out of their a**es, can’t they at least round to 10? Or do they actually explain how they got to 11%,as opposed, to say, 11.6%.
Come on folks, that sort of idiocy is right down there with the kind of garbage the street was spewing back in 1998-2000. Do yourselvesd a favor; don’t even click on crap like that.
I think the report basically wants to point out that recent drop we have seen so far can be doubled (X2)- how they come up with that 11% number.
So the real question is if we see another 11% fall, the market will be in a bear market (having drop more than 20% from the recent high) and probably heading for a recession - thus a higher chance of falling further.
Lucky for me my books where 60-70% hedged GLD and TLT. As long as this uncorrelated relationship holds up between Stocks Bonds and Gold I am good. Down about 6% in most books. When that relationship ends I am you know what. I Am tempted to go further with 80-90% hedge based on the number of new coronvirus reported daily it’s growing fast. You can debate all day long if countries are over reacting but when the VIX is over 30 it’s time for a minimum 50% Hedge or go to cash.
Are you allowing for a highly likely drop in sales, Walter? This isn’t just a market price adjustment period but a real, tangible economic impact slowly imposing it’s will. I personally don’t know if price/sales is meaningful here, just sayin’.
How about SPY call leap option? If we’re going to have vaccine in about a year, then 1 year option will be perfect for current scenario. The risk is stock go down further and buying call too early.
No accounting was made for sales decline. The ratio adjustment is only meant to reflect current revaluation to it’s historic range. I really should have done a better job describing the calculation. For ever stock in the S&P1500, it calculates Pr2SalesTTM/Pr2SalesTTM3YAvg and then averages those numbers. That value is then plotted over time. Currently, we’re seeing a value around 0.86. The smallest value over the past 10 years occurred on Dec’17 2018 and was 0.83.
If you want a price target, anticipating sales change would be appropriate. Coincidentally, an additional -5% drop would also take QQQ to it’s Jun’18 anchored VWAP.