Key Points

  • The questions continue to outnumber the answers, while the virus continues to infect people, markets and the economy.

  • Monetary and fiscal stimulus can serve as triage; but they’re not the cure.

  • Investor sentiment and market technicals are at extremes; but valuation analysis is pointless.

We know a lot more about COVID-19 than we did a few weeks ago; but there remain questions that are unanswerable at this stage. We don’t know how much worse this gets before it starts to get better (i.e., when the incidents of confirmed cases begins to level off, like they have in China and South Korea). We don’t know how severe the economic impact will be as a result of containment effort; or how long we will stay in this level of containment. Finally, we don’t know when markets will find their footing—especially given that traditional technical, sentiment and valuation metrics are less relevant in a pandemic-driven bear market.

If the virus wasn’t enough, we are also in the midst of a “fire sale in the bond market,” as my colleague Kathy Jones put it in a conversation. There was a global rush to cash. Outside of short-term treasuries, everything was for sale last week at discounted prices. Leveraged investors such as hedge funds, and those using margin, were forced to liquidate as prices fell. Portfolio managers had to sell to meet redemptions from institutional and individual investors. They sold what they could—those investments that were liquid enough to get a bid—including long-term treasuries. Much of the selling was indiscriminate, driven by the demand for cash.

Roll in the crash cart

Meanwhile, over in stock market land, we are in the midst of the swiftest move from all-time highs (February 19 in the case of the S&P 500) to a bear market in history—besting the move in 1929. As you can see in the chart below, the past two weeks’ decline has been one of the worst in stock market history. The rout has been exacerbated by the blow-out in credit spreads in both the investment grade and high yield corporate bond market—with the crash in oil prices and attendant impact on the beleaguered energy sector—yet another brush fire.

Epic 2 Week Plunge

Source: Charles Schwab, Bloomberg, as of 3/20/2020.

The high in the stock market is likely to be fairly close to the start of the recession we are undoubtedly in. The National Bureau of Economic Research (NBER)—the official arbiters of recessions—historically dated recessions’ starts well after the fact. But let’s take a stab at it and assume it started this month. Below is a history of all post-WWII -20% bear markets (allowing for rounding) which occurred in conjunction with economic recessions—with the bear markets typically starting in advance of recessions.

Source: Charles Schwab, Bloomberg, National Bureau of Economic Research. Bear market defined as 20% or greater drop in S&P 500. “Near” bear market defined declines of more than 19% but less than 20%. *3/24/2000–10/9/2002 is generally considered one long bear market (-49.1%), but there were two 20% rallies within that span. 10/9/2007–3/9/2009 is generally considered one long bear market (-56.8%), but there was one 20% rally within that span. **Does not denote end date. Current bear market is thru 3/20/2020.

As you can see, the market’s decline is right at the average; but that doesn’t prevent it from descending more, which is likely given the magnitude of the virus crisis. I’ve been in the business for 34 years and have been asked what the current environment is most reminiscent of historically. My response has been that it feels like a monster mashup of the Crash of ’87 (magnitude and speed), 9/11 (fear of the unknown), and the global financial crisis (GFC) of 2008 (serious economic hit to economy and financial system).