The Economist November 7th 2020 pp55-56 |Business|The Outlook for Corporate America “Still ailing” “Look beyond the frothy stockmarket and booming tech giants and you will find that much of American business is still in a sorry state”.
GDP trends. Index with January 2020 as 100. Pandemic trough was 85 different scenarios for mid-late 2021 predict pessimistic 98, baseline 102 and optimistic 105.
Total returns in American Stock Market with January 2020 as 100. FAMAA=Facebook, Apple, Microsoft, Amazon and Alphabet peaked at 160 now at 140 while the S&P peaked at 110 and now about 100 and without FAMAA the S&P500 peaked at 100 and now at 99.
Share of firms with a financial loss as %. Early 2020 Russell 2000 about 30%, peaked at 40% and now 38%. Larger firms represented by the S&P500 peaked at 15% and now 10%.
US Speculative-Grade (Junk Bond) Corporate Default Rate as %. Optimistic peak at 8%, baseline peak at 11% and pessimistic 18%.
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Economic data. Compared to the initial pandemic hit in Q2, Q3 2020 Q-Over-Q rose 33% annualized basis, big firm returns exceeded "beat-down" expectations, but revenues for median S&P500 firm rose only 1% YOY. Recently bosses are more optimistic with confidence up to 64 from 45 in Q2 2020. Analyst calls reveal temperment currently examples offered Visa says “recovery uneven”, Catapillar “holding more inventory…” All corporate balance sheets are challenged and “smaller firms are in big trouble.” Firms that have improved the bottom line have done so “not by boosting sales but by slashing their expenses…” which portends more economic damage. Companies having only domestic sales did better with a drop of 9% versus those depending at least in part on exports with a drop of 14%. Size matters as Binky Chadha (Deutsche Bank) comments we have “a tale of two stock markets”, as shown above, losses were reported by as many as 40% of small firms (Russell 2000) versus the peak of 15% for larger firms (S&P 500). Government stimulus, low interest rates and Junk Bonds have staved off more failures at least for now. Edward Altman (NYU) worries about “the enormous build-up of non-financial corporate debt” which by his estimate is at $360bn YTD in “high yield debt (ie, junk bonds). He “reckons that 6.5-7.5% of junk bonds by dollar value with default in 2020.”
What does the outlook depend on?
1) Fallout from the US Presidential Election
2) Timing of next stimulus package
“Corporate-debt defaults will continue to rise until March 2021”. The “economic recovery remains fragile amid risks of another pandemic resurgence” that could lead to more, likely targeted, lockdowns.