Biggest Recession Since The Great Depression?

Small Business Disaster

Small businesses are in a world of hurt even though the economic shutdown in America is only in its early stages. As you can see from the chart below, the yearly change in sales on March 13th was disastrous for arts & entertainment, lodging, restaurants, and bars.

Source: Bloomberg

We already know from the OpenTable data that restaurant sales got worse in the following days. Many of these firms will go out of business this spring because small businesses don’t have flexible financing. According to JP Morgan, half of small firms have 15 days of cash or less.

JP Morgan Predicts A Depression

As we have been discussing this week, estimates for economic growth have come down dramatically. The most comprehensive negative outlook came from JP Morgan on Wednesday. The table below is shocking to look at. The numbers don’t seem real. No one would believe them if you showed them to investors 4 months ago.

As you can see, America and Europe are expected to have contractions of 14% and 22% in Q2. Because China’s weakness is in Q1, rather than Q2, global growth is actually expected to be worse in Q1 than Q2. Q1 Chinese growth could be -40.8% and Q1 global growth could be -12%. The recovery is expected to be swift as JP Morgan sees a ‘V-shaped’ recovery. China will have a 57.4% Q2 growth, while America and Europe will have 8% and 45% Q3 growth. That will lead to 19.1% Q3 global growth.

Small Caps Are Cheap

Small-cap stocks are extremely cheap on a forward PE basis. That’s to be expected because the S&P 600 has fallen about 41% since February 20th. These firms have fallen sharply because access to capital is becoming constrained. Many of these firms aren’t profitable. As you can see from the chart below, the S&P 600’s PE ratio fell to 10.5 on March 18th which is very close to its fall of 2008 trough.

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