Headlines vs. fine print

03/12/20
  • SPX falls nearly 5% on Wednesday, WHO declares coronavirus a global pandemic
  • Goldman Sachs projected more downside for stocks
  • Forecast may be more bullish than it initially appears

Emotions are the enemy of successful trading and investing, but when market volatility is hitting levels not seen in more than a decade, it can be difficult to look at things objectively.

Yesterday was a perfect example.

On the same day the World Health Organization (WHO) declared the coronavirus a pandemic, Goldman Sachs probably added to an already acute level of gastrointestinal distress among investors when its chief US equity analyst forecasted a mid-year S&P 500 (SPX) target of 2,4501—10.6% lower than yesterday’s close, which itself was around 19% below February’s all-time high.

Gulp.

While few long-term investors likely welcomed such a forecast, those willing to read past the headline—and consider the implications of the numbers—may have been a little less rattled:

1. This forecast means that between now and June, Goldman expects the SPX to drop less than half as much (291 points) as it already has from February’s high (645 points). In other words, it suggests Goldman sees the sell-off as closer to its end than its beginning. A lot closer, in fact.

2. Also, the firm gave a year-end SPX target of 3,200, which implies a 30.6% rally off the mid-year forecast low, and would put the index 16.7% above where it closed yesterday.

Goldman’s downside target is a little above the SPX’s late-2018 low close of 2,351.10, and a little below the 78.6% Fibonacci retracement level (2,574) of the December 2018-February 2020 rally noted in “Bubble, bubble, oil and trouble:”

Chart 1: S&P 500 (SPX), 10/10/18–3/11/20. S&P 500 (SPX) price chart. Downside targets

Source: Power E*TRADE


Forecasting is difficult game in the best of circumstances, let alone when the market is experiencing one of its biggest shocks since 2008. And even the best of them can make mistakes in this game.

Lest we forget, Goldman’s 2,450 mid-year target was a revised estimate—that’s not where they thought the SPX was going a few months ago—which is a reminder that no single forecast, regardless of the source, should be accepted as gospel. (Some traders may wonder why, for example, if it’s plausible that the SPX could drop to 2,450, it wouldn’t just go ahead and do the Full Monty and dip another 4% to test the December 2018 low. But that’s another story.) Unexpected events can change forecasts on a dime.

That said, investors and long-side traders may find it encouraging to discover that what may have initially appeared to be another bearish cloud hanging over the market had a surprisingly bullish lining.

The market, after all, has bounced back from the Great Depression, Pearl Harbor, the Cuban Missile Crisis, the 1987 crash, the dot.com implosion, 9/11, the 2008 financial crisis, the European debt crisis...the list could go on.

Although no one knows exactly when or at what level the coronavirus sell-off will end, traders (and firms) that have experienced similar events know that, eventually, all shocks run their course.

And they plan accordingly—even if they know they may have to adjust those plans tomorrow.

Market Mover Update. Like the stock market, crude oil continued to test trader nerves. After a 25% sell-off on Monday and a 15% rally on Tuesday, yesterday April crude oil futures (CLJ0) fell more than 4% to close below $33/barrel as Saudi Arabia doubled down on its oil-war stance, vowing to increase its output.2

The Bank of England (BOE) was the latest central bank to jump on the rate-cut bandwagon, trimming its main lending rate from 0.75% to 0.25%. The BOE also announced it would make £100 billion in funding available to small businesses.3

Today’s numbers (all times ET): Producer Price Index, PPI (8:30 a.m.), European Central Bank (ECB) announcement (8:45 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: 58.com Inc (WUBA), Adobe Inc (ADBE), Ulta Beauty Inc (ULTA), Broadcom Inc (AVGO), Oracle Corp (ORCL), Dollar General Corp (DG), DocuSign Inc (DOCU), Jabil Inc (JBL), Slack Technologies Inc (WORK).

 

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1 CNBC.com. Goldman says the bull market will end soon with stocks dropping another 15%. 3/11/20.

2 The Wall Street Journal. Saudi Arabia Signals Bigger Oil-Output Boost, Pushing Crude Price Lower. 3/11/20.

3 The Evening Standard. Bank of England cuts interest rate amid coronavirus outbreak. 3/11/20.

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