Uncategorized, Weekly Update

The Coming Recession

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Published March 13, 2020


This week the stock market made it crystal clear that it is fully expecting a recession in the coming months. Markets have delivered the second fastest decline in history, second only to a drop during the Great Depression. We would also like to remind our readers that it is trying market times like these when our TimingCube models provide unparalleled benefits. In the bear markets of 2000, 2008, and again recently, our models have put us on a profitable side of the market while stocks broadly fell hard and fast.
For example, our Turbo Model is profitable by +8% so far in 2020 while the stock market is down almost -20%.
Consider our models a source of calm in the fury of the market storm.

To provide some context for stocks and recessions, we are providing a recent article from Ben Carlson that gives us some historical data to frame our expectations. We hope you find it useful. Herewith is Mr. Carlson’s work:

“It’s time to start seriously preparing for the possibility of a recession for the first time in over a decade.

The coronavirus is slowing down businesses, wreaking havoc on the travel industry, shutting down large events, quarantining large groups of people, closing down schools, testing our healthcare capabilities, and leading to a level of fear we haven’t seen in some time. The global economy is taking hits from all sides at the moment.

I may be getting ahead of myself here but it’s worth preparing for an economic slowdown because it looks like the coronavirus is going to be with us for a number of months at a minimum.

Stock market corrections can happen for any number of reasons but recessionary periods typically produce some of the worst market crashes in history. The Great Depression, the 1937 recession, 1973-75 recession and the Great Recession all caused the markets to be cut in half or worse.

But not every recession leads to a complete disaster in the stock market. There have been a number of times throughout history where the United States went into a recession but not a debilitating market crash.

After looking through the numbers there are basically 3 tiers of market downturns that correspond to a recession. The first tier are those recessions with the worst corresponding market crashes over the past 100 years or so:

Recessions with the worst corresponding market crashes

These are the most well-known crashes other than the 1987 crash (which somehow didn’t have anything to do with an economic slowdown). The average plunge in these 5 instances was -59% (which is skewed heavily by the Great Depression). The only one that really had nothing to do with a severe economic downturn was the early-2000s. That was more about an unwind of speculation due to the dot-com bubble.

The next recessionary market correction is the more run-of-the-mill bear markets:

Recessionary market correction

The average retreat in the stock market during these periods was a loss of 27%. None of these recessions or corrections were all that memorable in terms of market history although the 1969-1970 crash that led to the end of the go-go years is worse than many realize. Finally, here are the corrections that correspond with a recession that never even made it to the technical -20% definition of a bear market:

Recession that never even made it to the technical -20% definition of a bear market

The average decline in these 4 periods was just 16%. The 1990 recession was worse than people remember while the 1945 post-WWII downturn had more to do with a huge jump in inflation from wartime spending.

Now here’s the overall picture in order:

Recession overall picture

Recessions aren’t great for the stock market which is an obvious statement but they don’t always signal the end of the world either.

The current downturn is already worse than three of these. As of the close today, the S&P 500 is down 19%. Small caps (Russell 2000) are down 21% while mid caps (S&P 400) are down 25%.

It doesn’t matter if we hit the NBER definition of a recession in the coming months because stocks are already pricing in that scenario.

Right now I’m sure the only thing most investors care about is how much worse things could get from here. That’s an impossible question to answer because not only do we have no clue about how the upcoming months will shake out, no one can possibly guess how investors and the public at large will react to the pandemic as we learn more.

(The time horizon given in all of the charts here is for the lengths of the recessions only, not the stock market downturns. The stock market declines don’t match up perfectly with the timing of the economic contractions because things are never that easy.)”

Market Update

Hard to believe, but volatility took another step higher this week causing panicky moves in all markets. The drama started over the weekend when Russia and OPEC could not agree on oil production quotas. Russia’s vow to maintain existing production levels was matched by Saudi Arabia’s vow to increase production and lower prices significantly. Oil prices plunged over -20% on the day kicking off an enormous bout of fear in markets. The 10-year U.S. Treasury rate fell to 0.5%, its lowest level ever. Stocks sold off hard triggering a temporary halt to trading to allow market participants to step out of the melee. Stocks closed Monday down -7.6%. Stocks staged a sharp +4.9% rebound Tuesday as White House officials floated several ideas to lessen the economic impact of the Coronavirus. However, markets gave the gains right back Wednesday as a spate of negative news drove investors back to safety. The Fed took action to add liquidity to markets, which did provide support to the bond market as yields rebounded. Goldman Sachs declared the decade-long bull market over. And the World Health Organization (WHO) determined that the coronavirus had reached pandemic levels. Stocks were slammed downward by -5%. That was all just an appetizer for Thursday’s complete rout of stocks with market indexes posting their worst day since the market plunge of 1987. The -9.5% drop began overnight Wednesday in response to a speech by President Trump announcing travel restrictions to and from Europe. The restrictions made plain the severity of the virus as it spreads throughout the U.S. and was the first real federal government effort to try and contain the virus with a broad measure. But that enormous decline was also reversed the following day. Friday brought Congress closer to a package of economic stimulus efforts that seemed to encourage investors into the weekend. The +9.2% gain found half of its upward move just in the last hour of the week’s trading.

An extraordinary week in markets with stocks halted for trading twice and futures reaching limit levels also two times. Despite Friday’s monster recovery, the S&P 500 (SPY) still posted a loss of -9.46% for the week. The Nasdaq 100 (QQQ) was down -7.54%. Small cap stocks (IWM) hit the full panic button with a -17.26% crushing.

Warm wishes and until next week.