Stocks fell hard Wednesday as valuations have stretched and investors realize the U.S. economy isn’t out of the woods on the coronavirus and continues to reconcile with the extent of the economic damage.
All three major U.S. indices fell, with the S&P 500 falling as much as 2.8%. Investors piled into the 10 year treasury bond, with the yield falling to 0.68% from 0.75%, signaling a move into the bond beyond just the Federal Reserve’s buying program.
“News on how long and how deep the coronavirus-led recession should continue hitting the global headlines and sour the investor mood,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
Entering Wednesday, the average stock on the S&P 500 was trading at 18.8 times 2020 earnings per share, a rich multiple given the risks on the table of the next few years, as Wall Street debates how fast an economic recovery will be from the recession that U.S. is likely in. Earnings for 2021 and even 2022 for some sectors may not rebound to the magnitude some think they will.
Investors had looked past the virus, which looks to be abating, and were pricing in beyond the next year of earnings. “Current valuations price an optimistic assumption for medium- and longer-term economic outcomes,” said Lauren Goodwin, economist and multi-asset strategist at New York Life Investments. “We do not think that current multiples reflect the substantial and bleak economic growth prospects that investors face in the near term. Markets are priced for perfection, and risks are firmly skewed to the downside.”
Investors think the 9.7 million barrel per day oil production cut agreed on by OPEC isn’t enough to keep prices rising. Crude oil fell more than 2% to a new 2020 low of $19 a barrel. Many had expected a 20 million barrel per day cut.
Some note that a decent portion of the heavy heavy loan loss provision expense that decimated JPMorgan (JPM) - Get Report and Wells Fargo (WFC) - Get Report earnings Tuesday was attributable to poor oil company credit.