Thursday, March 19, 2020

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‘Guidance is futile’

As the coronavirus crisis escalates, Wall Street’s smartest analysts have published some very unusual commentary.

“In economic parlance, the current environment is one of pervasive ‘Knightian uncertainty’ — that is, an unknown for which we cannot even quantify the odds of various outcomes,” JPMorgan economists Michael Feroli and Jesse Edgerton wrote on Wednesday.

With that said, they went on to predict that U.S. GDP would plummet at a 14% rate in Q2 before bouncing back. They explained: “the very process of producing a forecast still possesses some value.“

This follows Pantheon Macroeconomics economist Ian Shepherdson, who on Monday said, “We now guesstimate that second quarter GDP will drop at a 10% annualized rate.”

Guesstimate? Knightian uncertainty? Really?

Unfortunately, that’s about as good as it gets in terms of thoughtful forecasts provided by Wall Street analysts. Most of Feroli and Shepherdson’s peers have been paralyzed by the fact they have very little to put into their forecasting spreadsheets.

This is especially the case with Wall Street’s equity analysts and strategists, many of whom probably haven’t updated their earnings estimates since before it was called “COVID-19.”

“Only 15% of Wall Street analysts have updated their numbers over the past 7 trading days,” Credit Suisse’s Jonathan Golub wrote on Wednesday afternoon.

Most analysts have been in a holding pattern with their earnings forecasts because they hope to get guidance from the corporations they follow. After all, managers will have access to the best information. (And because of this, the market selloff has created the illusion that stocks are cheap.)

Unfortunately, that guidance doesn’t appear to be coming.

On Tuesday after the closing bell, FedEx (FDX) said it was suspending its earnings forecasts. Earlier that day, L Brands (LB) withdrew earnings guidance. Before that, United Airlines (UAL) and Royal Caribbean (RCL) both suspended guidance. All blamed the unprecedented uncertainty caused by the coronavirus pandemic.

“The question for managers is do they know about future performance substantially more than investors do? My guess is that in most cases managers aren’t now better informed than investors,” said Baruch Lev, the Philip Bardes professor of accounting and finance at NYU’s Stern School of Business.

“We are all in the dark,” Lev said to Yahoo Finance. “In that case, guidance is futile.”

Gosh, even the Federal Reserve announced on Sunday that it was suspending its summary of economic projections, saying “it really is depending heavily on the spread of the virus, and the measures taken to affect it and how long that goes on. And that's just not something that's knowable. So, actually writing down a forecast in that circumstance didn't seem to be useful.”