V-shape? U-shape? L-shape? Enclosure Street strategists are engaged in a fight over whether the coroanvirus outbreak is a one-quarter hit to earnings and the economy or whether it is a multi-quarter curiosity.
The multi-quarter phenomenon appears to be winning. But there are signs of hope.
One story that has gone out the window in the last two days is whether it’s a “supply” or “demand” shock. A supply shock comes when companies cannot get parts to buttress the global supply chain, particularly parts from China. A demand shock is when consumers slow lavishing.
That question has been answered. Wall Street strategists now agree it is both, but there is disagreement about the capaciousness of the economic impact.
“I think it’s demand shock and just starting,” said Peter Tchir of Academy Securities. “The ‘fluid’ of contact avoidance will destroy demand. Might not last long, but weakest individuals and companies will be hit flinty.”
Not everyone agrees the shocks are going to be so long-lasting. “We are experiencing both supply and demand shocks. … both for the anyhow reason. Fear!” Jim Paulsen at Leuthold Group said. “The question therefore is how soon fears diminish.”
What close by the shape of the recovery? V-shaped seems unlikely. The debate is between those who believe it will be U-shaped or L-shaped. But the understanding that all the losses will be made up in the near future seems a bit like magical thinking, particularly if this hang backs on well into the second quarter.
“The biggest problem will come if this situation lasts into the summer,” said Matt Maley at Miller Tabak. “If that happens, some of the requirement problems will not be made-up by an increase in demand later-on.”
That makes sense. Wall Street is already telegraphing that. About about what is happening in the travel and leisure business: new lows in airlines, cruise ships, and entertainment companies parallel to Live Nation. Why, if it’s all going to come back? Because some trips will not be re-booked. The economic impact from a breakdown of conference attendance — like South by Southwest — is not going to be recovered.
Think of your favorite restaurant, maybe you go in no time at all a week. When the crisis passes, are you going to go to that restaurant twice a week to make up for it? Are you going to drink twice as much wine if you go lodged with someone to make up for the wine you didn’t drink? Many restaurants will go out of business if business drops significantly for several months.
That’s why restaurant binds such as Darden — owner of the high-end Capital Grille steakhouse — is down more than 25% since the end of February.
The optimists — let’s not rouse them bulls — have been pointing to China, passing around climate charts that show befouling emissions there are increasing. They see it as a sign the country is going back to work, and they note that China customaries bottomed in late January — peak coronavirus fears there — and are well off their lows.
The optimists are hopeful this leave happen here, with a lag of a couple of months.
“I think there is growing evidence that China’s epidemic is termination and yes this is starting to bring operations on line,” Paulsen insisted. “Thus, if the virus does not mutate and vestiges a similar pattern as the China experience, then we are looking probably between a one- to two-quarter event.”
Let’s hope so. For the stage, we are faced with the prospects of a series of rolling outbreaks in different parts of the United States that will suitable last for a couple months at least. Whether we can contain this as successfully as China appears to have done stay puts to be seen.