Earnings estimates continue to drop as the economic impact of the coronavirus is now beginning to show its ugly head. This week, a few data points for March showed that the potential economic impact on the country could be devastating.

Empire State manufacturing survey fell to - 21.5, which was worse than estimates for 4.8, and indicates that the economy is likely already in a recession. The last time the reading was this low was in 2001 and 2008.

If that is the case, then earnings estimates are going to look more like the worse case scenarios I have been projecting in previous weeks. If this is a recession, than it likely means the first and second quarters could see steep declines in earnings power.

I fear that this period may mimic something worse than 2008, given the size of the shutdowns that have taken place across the country in recent days. If it is the case, then earnings in 2020 could fall by as much as 30 to 40%, similar to what we saw in 2008. If that is the case, then earnings for 2020 could drop to roughly $95 to $110 per share in 2020, followed by a bounce of about 20% in 2021, lifting estimates to $113 to $130 in 2021.

It would give the S&P 500 a fair value range of around 1,827 to 2,130, using a 16 one-year foward PE ratio. That is a drop of an additional 8 to 21%. It may be a wide range, but again we do not have enough data to firm this up. Hopefully, that will change in the weeks ahead.

Slow Recovery

I am fearful as well that the economic reboot could be slow; as companies and businesses come back online slowly, as this is not likely to be a typical recovery cycle, given that people may be reluctant to reemerge from a lockdown state or a period of unemployment. 

2018 Lows Are Gone

With the 2018 lows now officially taken out, and Friday’s close below that low, the next level of technical support comes somewhere around 2190, 2090, and then 1810.

I realize this is a pretty dramatic change from where I stood last week, but as the data rolls out, and after seeing the sharp rise in initial jobless claims - which increased this week by 70,000 to 280,000 from 210,000 - coupled with the weak Empire State, and the Philly Fed Business Outlook, I can’t help but think things are now officially coming unglued.

Additionally, it seems that states like California and New York are likely to be the model for what is to come across the country. Living in NY, things have gone from ordinary to bizarre in under a week. 

Unprecedented Time

We are now living in an unprecedented period, and I expect that we are likely to see things get worse before they get better. A decline to 1810 on the S&P 500 would be about 47% from the peak, and on a similar footing to what we saw in 2008. My only fear is that if it is possible, this really could be worse than in 2008. 

There are about 12.2 million people that work in bars and restaurants in this country, and around 15.6 million in retail. A decline by just 10% in employment, which I think may be conservative, could result in about 3 million jobs lost during this time. That increase the number of unemployed to almost 9 million from around 6 million now.

Changing Allocations

These are unprecedented times, and they call for a different way of thinking. It is one reason why, unlike in 2018, I made several significant changes in my portfolio and drastically reduced my equity holdings and raised cash. It is one of those scenarios where I hope this time I am wrong.