Investment banks are washing away models from the 2008 financial crisis to pinpoint the correct time to buy back securities into stock markets that have dumped 30% from their February record highs because of the coronavirus pandemic.
That influenza point is not easy to model because of the widespread of the coronavirus crisis not only in Europe and the United States but in the entire world.
But the U.S. government’s $2 trillion in influenza stimulus, coming on top of unheard-of measures from the U.S. Federal Reserve and other central banks on Tuesday, embarked one of the sharpest global equity market rallies in past few decades.
Wall Street’s so-called fear pinpoint, the Cboe Volatility Index, has also deflated.
Veteran investor Bill Ackman told owners in his listed Pershing fund that he had turned into an increase in securities and credit, and taken off boundaries he put in place in early March when markets first started having cratered.
He claimed Pershing was “reassembling our capital in companies we love at bargain prices that are constructed to hold up strong against this crisis.”
Goldman Sachs’ viewpoint was that this week’s record stock market rally had been led by “underweight” sectors, suggesting many funds had been covering short positions. Indeed, energy, travel, and auto stocks were Tuesday’s biggest gainers.
At Morgan Stanley, Andrew Sheets, head of cross-asset strategy, said in these situations, including in 2008, markets often trough well before the crisis actually ends.
From the 2008 trough, there followed a decade of remarkable gains that added more than $25 trillion to global equity value.
The market won’t need to see a peak in U.S. coronavirus cases, it just needs to see some validation of the path, and it needs to be happy with the trail,” Sheets said.
But so far, he remains underweight credit and has only been on the edges, which enhanced equity exposure.
JPMorgan says there is more than one way of calculating it, especially given to the innovative nature of the pandemic, which hit the real economy first, with financial markets following.
John Normand, JPM’s head of cross-asset strategy, said one model suggested now is the time to re-enter — a quarter before the breakdown is likely to end. His view is that the coronavirus-induced pandemic will be “undoubtedly deep but also possibly the briefest-ever.”
Normand also said owners could wait for “green shoots” or proofs of an actual upturn — mirrored in a trough for JPMorgan’s global Purchasing Managers Index.
A third, valuation-based model claims a “Buy” signal when risk increased across many of the asset classes come to specific “deep value” thresholds terminal.
Norman said the latter two models were not yet reporting it was time to buy.
Specifically, U.S. and European stock valuations based on a 12-month forward price-to-earnings ratio now have tucked in well below historical averages, according to Refinitiv research.
Meanwhile, credit markets are still sending tribulation signals. In essence, yields on junk-rated U.S. bonds are around 9% currently compared to 6% a month ago, meaning many companies may find it hard to service debt.
In Europe, an index of European credit default exchanges, ITEXO5Y=MG that measure the default risk of a basket of sub-investment grade companies, is off its peaks but remains inflated at around 520 basis points, almost double end-February levels.
The crisis in 2008 was a long one — some economists faced problems this time as a turnaround in global growth will come by the third quarter overall.
Yet some also warned that markets are only now coming to grips with how deep a potential downturn could be.