34 BARRON’S March 16, 2020
Photograph byRICKY RHODES
Q&A
An Interview with Ed Yardeni,
CEO, Yardeni Research
Bear Won’t
Depart Till
Midyear
W
hat a week. The long bull market finally
ended, as worries about the coronavirus
pandemic and slumping oil torpedoed
stock prices.Barron’searlier had been
talking to Ed Yardeni, the renowned
stock market forecaster, about his new
book,Fed Watching for Fun and Profit, but
the pandemic required several re-interviews to keep
pace with quickly worsening developments.
Yardeni, like all good analysts, is disciplined in evalu-
ating unknowns and competing scenarios and adjusting
his views. Although he has dismissed previous market
jitters as “panics,” he has downgraded his forecasts for
growth and earnings to reflect the new unknowns. Read
the following condensed and edited remarks for more.
Barron’s: You normally have a sunny outlook. But
officially, we’re in a bear market.
Ed Yardeni:I’d expected we might get a correction; I
didn’t expect a virus. We’ve seen the impact on the stock
market. We’re about to see the impact on the global
economy. We should anticipate very shortly a pretty
substantial drop in consumer confidence. [The Confer-
ence Board Consumer Confidence Index will be released
on March 31. In February, it increased slightly.] I don’t
care how good the labor market has been. People are
naturally going to fear the worst, given the extreme mea-
sures governments are taking. They’ll focus on the latest
bad news and ignore areas of progress.
The problem is, the pandemic of fear is spreading
much faster than the actual virus. China had 80,796
cases as of yesterday, with a population of 1.4 billion.
South Korea had 7,869 cases, with a population of 51
million. They’re making progress, apparently, in China
and South Korea in containing the virus, and even in the
epicenter of Hubei province they’re talking about slowly
By LESLIE P. NORTON
March 16, 2020 BARRON’S 35
The economist, who generally was bullish throughout stocks’ long march upward,
has long been viewed as one of the top market and economic analysts on Wall
Street. His research has a broad following among institutional investors.
resuming transportation. I don’t know
what purpose it serves when [German
Chancellor] Angela Merkel scares the
living daylights out of people. [Merkel
has warned that 70% of Germany’s
population could contract coronavi-
rus.] It didn’t even spread to 70% of
the Chinese. People aren’t focusing on
the fact that 80% who get infected are
likely to suffer only mild symptoms,
and that may be understated; that the
most vulnerable are older people. Italy
has everyone spooked: It has a highly
geriatric profile, and we know that
older people are more susceptible to
the virus. Put this into perspective:
Nearly 1.25 million people die in road
crashes each year globally, on average,
3,287 a day. An additional 20 million
to 50 million are injured or disabled.
We’ll see a recession on a global
basis. Japan and Germany will un-
doubtedly fall into recessions. Italy will
have a very severe recession, with its
national lockdown. Is the U.S. economy
resilient enough to decouple? Probably
not. The fear factor is spreading faster
than economists like myself can gauge.
My guess is that the virus will dissipate
significantly by the middle of the year,
based on the experience of China and
South Korea and previous virus out-
breaks. The recession and bear market
in stocks should end by then.
How much have you reduced your
earnings forecasts?
I took my estimate for S&P 500 index
profits down from an increase of 5.5%
to flat, with an earnings recession in
the first half of the year. A global reces-
sion is very likely and for the U.S. in-
creasingly likely. I’m still looking for
2% real gross-domestic-product
growth for the year as a whole. On top
of everything, the Saudis and Russians
are fighting about oil production,
which caused prices to collapse. That
alone is reminiscent of 2015, when we
had a growth recession in the global
economy and earnings, and it added to
downside risks for the energy sector.
My thinking is they won’t be able to
take the pain of having oil prices this
low for long. On the supply side, there
will be cutbacks: U.S. shale producers
will be forced to cut production, or the
Saudis and Russians will come up with
a deal because prices this low are a
calamity for both of them. They
wouldn’t mind if there’s collateral dam-
age in the U.S. The best cure for low oil
prices is low oil prices. But then we’re
back to the demand side and having to
be a virologist and a psychologist.
How low do stocks go from here?
A 30% drop from the top of the S&P
500 brings us to 2300-2400. I had
originally expected 3,500 on the S&P
500 by year end, and we got to 3,300
in February. Now, I’m thinking 3,500
will be in 2021. There will be recovery
and resumption of the bull market. I
think it will be like 1987 all over again.
Most of the downside should occur
between now and the middle of the
year. My year-end target is 2900 on
the S&P 500.
The bull-bear ratio, which comes
out every week, has taken a deep dive.
The faster bearishness goes up, the
better for the outlook. The bull-bear
ratio is 1.58. It had been 2.04 the week
before and over three at the beginning
of the year. A lot of it is still people
moving from bulls to the correction
camp. Bears only edged up from
20.4% to 22.9%. In 2008, the percent-
age of bears was over 50%. A lot of
people are still net bullish.
Should investors be buying now?
If you have cash, this is the time to buy
quality names, some of the dividend-
yielding stocks. They’re trashing utili-
ties, consumer staples, quality compa-
nies that pay dividends and have
always paid dividends in recessions. In
an environment where interest rates
are close to zero and may stay there for
some time, dividend stocks are quite
attractive. People sell companies they
like in panic environments because it’s
harder to raise cash [with illiquid
names]. There could be another down-
draft in oil—so no rush to jump into
energy stocks, even though I’m not in
the camp that believes we’re never go-
ing to use oil again. The best opportu-
nities are in blue-chip companies with
a long history of paying dividends.
Last year, you started recommend-
ing that U.S. investors buy over-
seas equities.
I did that last October, after the Fed-
eral Reserve lowered interest rates for
the third time, because the U.S. was
pretty richly valued. This past Febru-
ary, I recommended people stay home
[with investments], given this virus.
What’s the worst-case scenario?
That it’s 2008 all over again. That’s
unsettling, because the Fed doesn’t
have much ammo left, and fiscal pol-
icy is tough to get going, and it means
bigger deficits.
You’ve described Fed chief Jerome
Powell as a pragmatist. Will we see
“Helicopter Jerome” soon? [For-
mer Fed chief Ben Bernanke once
suggested that ametaphorical heli-
copter drop of money could com-
bat deflation.]
To avoid a worst-case scenario, Presi-
dent Donald Trump and Powell could
work out helicopter money—a tax cut
financed with bonds purchased by the
Fed. The good news is that banks are
in better shape than they were going
into 2008. The bad news is that half of
nonfinancial investment-grade corpo-
rate bonds are triple-B rated and on
the edge of turning into junk. If [an
institutional investor] is required to
own investment-grade, there could be
more pressure on credit spreads.
Trump is talking about help for the
shale sector. Does it make sense for
the government to bail out the shale
industry, when in this contentious
political environment, the only thing
they can agree on is relief for low- and
middle-income people at risk from
incomes being hit hard?
None of these policies can create a
recovery. To do that, we really have to
get past this pandemic of fear. The
Fed will be looking for more-uncon-
ventional policies, which will un-
doubtedly lead them to lowering in-
terest rates to zero and, once we get
there, revive quantitative-easing pur-
chases of bonds. Eric Rosengren, the
head of the Fed in Boston, threw out
the idea that Congress may need to
amend the Federal Reserve Act to let
the Fed buy other assets, possibly
corporate bonds. Restarting pur-
chases of Treasury bonds won’t make
a difference since the bond yield is
already close to zero. Fiscal stimulus
measures like tax cuts will help to
soften the blow, but can easily be fi-
nanced at near zero yields currently. If
those yields rise, then QE can help
keep a lid on them.
Trump has been beating on Powell
to lower rates. I wouldn’t be surprised
to see a Rose Garden news conference
where Trump and Powell announce
helicopter money—a tax cut financed
by the Treasury, with the Fed agreeing
to buy those bonds. I’d give it a 30% to
40% likelihood. [The Federal Reserve
said this past week that it would inject
more than $1.5 trillion into short-term
funding markets to prevent ominous
trading conditions from creating a
sharper economic contraction.]
The stock market has adored
Trump, and vice versa. What now?
I’d give Trump’s response a C-minus.
He can’t afford to be viewed as hav-
ing bungled the government’s re-
sponse to the coronavirus. This could
be his Hurricane Katrina. [Former
President George W. Bush is per-
ceived by many as having failed to
deal withthe devastating hurricane
quickly enough.] But this would be
Katrina, right before the election. He
could very well lose if he’s widely
perceived as having been too optimis-
tic and not responding with enough
urgency. [Current Democratic front-
runner] Joe Biden will play that issue
every time he speaks. He’s already
saying the president has bungled it.
It’s an open horse race. Trump has
made it very clear over his term that
he views the stock market in some
ways as a better and more useful poll
than the other polls of citizen senti-
ment. Now he’s stuck with that. If
Trump loses this war against this
virus, he won’t get another term.
How would a Biden presidency
be taken by the market?
The market could live with Biden. The
market focuses on earnings and valua-
tions. Biden is not the kind of threat to
the underlying structure of business
the way Sen. Bernie Sanders might
have been. We had eight years of Pres-
ident Obama, another Democrat, and
the stock market did extremely well.B
“If Trump loses this war against this virus,
he won’t get another term.”Ed Yardeni
Opportunity
Beckons?
“If you have
cash, this is the
time to buy some
quality names,
some dividend-
yielding stocks.”
2900
Yardeni’s year-end
estimate for the
S&P 500, after it
bounces back
from a plunge that
he says could take
it as low as 2300.