Stock Traders Seem to Have Overshot to Downside

Is the potential for an economic slowdown priced in to financial assets? There’s been no bigger question in global markets after riskier assets such as stocks melted down in December. Judging by the recent performance MSCI All-Country World Index, the answer seems to be yes.

In the U.S., for example, the 19.9 percent plunge in the MSCI USA Index between late September and Christmas Eve left shares trading at their lowest levels since 2013 relative to estimated earnings. Even with the rebound since then, investors are pricing in about a 60 percent chance of a typical recession this year, where earnings drop by 9 percent, according to strategists at JPMorgan Chase & Co. led by Nikolaos Panigirtzoglou. That seems extreme, considering economists surveyed by Bloomberg News put the odds at about 20 percent. Market participants will get a better sense of how Corporate America sees the outlook in coming weeks as companies report fourth-quarter results. The cynics might argue that given the deep slide in stocks last quarter, executives have cover to lowball the outlook so they can look good by beating these lowered expectations later in the year. Although the consensus is for U.S. companies to report greater than 12 percent growth in fourth-quarter earnings, increases in the first quarter are forecast to be less than 4 percent, and less than 5 percent for the second quarter as the benefit of lower tax rates wear off, according to Bianco Research. For the year, earnings are seen rising a bit less than 8 percent.