Published March 27, 2020
This week, as we hunker down and ‘shelter-in-place’, we offer an assortment of bear market observations. First, we will start with noted market observer Josh Brown’s views on whether the stock market has seen its worst days yet. That is followed by Dan Sullivan’s more historical view on bear markets. We remind readers that Wall Street is in New York City, which has been on the front lines of the virus in the USA over the past few days and weeks. It’s no surprise, then, that the investment community in NYC will feel more besieged by the virus news than some other parts of the country. Keep that context in mind as you read.
Here is Mr. Brown’s assessment to start things off:
“Yesterday, someone asked me if I thought we had seen the bottom for the S&P 500. I don’t think we have.
I also don’t see the Congressional CARES package as “stimulus.” I see it as a rescue. Stimulus is what you do for a slowing economy. This is an economy that’s gone into cardiac arrest. So we’re taking out the paddles to try to keep it alive awhile longer. Same with the Fed’s rate cuts and resumption of QE. We’re keeping the patient alive.
Checks in the mail coupled with increased unemployment benefits are a good thing, don’t get me wrong. But the way to think about this plan is that at best it’s going to prevent civil unrest. Talk to me a month from now if we’re all still in our houses. In the meantime, Q1 earnings reports are going to be shocking. We’re weeks away from seeing them, along with the accompanying guidance, assuming any CEO actually wants to issue guidance. We’re also still a week and change away from seeing March employment data, which is going to be so outrageous it will look like a typo. April will be worse, regardless of all the fiscal programs being announced. The only way stocks can hold on through all of that is if we start succeeding on the health front. No sign of that in sight.
And so what Congress and the Fed have done is fine. But the underlying problem has not been fixed.
I don’t see any meaningful bottom for stocks until we get some wins against the virus. Italy has to see new infections peak. That will be a huge upside catalyst for the market when it happens. New York will be even bigger. But neither of these things appears to be imminent. Everything reads as though the situation is getting worse, and faster.
Is this applicable to whether or not one should try to market-time a bottom in stocks? I don’t think so, only because I believe the market will be faster to figure out that the disease has topped out than I will. I hope I’m wrong and that we’ve seen the worst for stock prices. I just don’t think so. Not with the infection rate in New York City still doubling every three days and huge regions across the country acting as though this is no big deal.”
Adding to Mr. Brown’s expectation for a retest of market lows is the following from Dan Sullivan:
“As this is written, the market is exhibiting what technicians refer to as a dead cat bounce. In three trading sessions the Dow has rocketed ahead 2,962 points or 21%. Historically, we can expect the recent lows to be tested in the not too distant future. However, having said that, the lows could be in given the market’s ability to put together three explosive days in a row accompanied by well above-average upside volume.
Tuesday’s rally that saw the Dow jump +11.37% was the greatest up-move on a daily basis since April 19, 1933 when it gained 12.5%. It is interesting to note that in 1933 the Dow gained another 5.8% the following day, and then proceeded to gain another 50% through the middle of July before a correction of any consequence set in.
But that was then, and this is now. The U.S. was coming out of the Great Depression at the time. There was a similar two-day rally at the end of October 1929 when the Dow tacked on gains of 12.34% and 5.80%. The Bear market was just getting underway and was destined to fall another 80%.
The strongest daily advances invariably take place during bear markets. For example, the last four years of the bull market that just ended on February 19th entailed only two days that the S&P 500 gained in excess of 3%. In the last bear market that ran from October 9, 2007 through March 9, 2009 there were 23 trading sessions that saw the S&P 500 post gains in excess of 3%: there were eight 3%+, eight 4%+, two 5%+, three 6%+, one 10%+, and one 11%+ up days. On each and every occasion lower prices prevailed.
In the March 24, 2000 through October 9, 2002 bear market in which the benchmark S&P 500 lost 49.1% there were 17 occasions that encompassed daily up days of 3% or more. There were twelve 3%+ days, three 4%+ days, and two 5%+ days. Again, lower prices prevailed.
Since setting record highs on February 19th, the benchmark S&P 500 lost 33.9% through March 23rd. As you know, a loss of at least 20% defines a bear market. Based on this criterion, there have been 11 bear markets since 1946. In a little over a month the market has already exceeded more than half of the previous bear markets in attrition. Many analysts feel that this bear market is quite similar to 1987, which saw the S&P 500 lose 33.5% between July and December of that year. They could well be right based on the explosive rally we have witnessed over the last three days.”
However, we would note that the 1987 drop was really contained to financial markets with very little impact on the broader economy. The current stock market decline will undoubtedly be occurring concurrently with a notable economic pullback. The depth and length of that decline is expected to drive the market’s recovery pattern. As the above long-time market observers note, it would be a surprise for the market weakness to be already past us. Buckle up!
Market Update
Stocks finally found some buying support as Congress passed a bill to stem the economic damage from COVID-19, and the Federal Reserve continued extraordinary measures to backstop market liquidity. The week kicked off with a -3% decline as Congressional leaders seemed stuck over the aid package and unemployment numbers looked to soar. The skies parted Tuesday for stocks with markets delivering their best day since 1933. The +11% rally came as investors looked past virus concerns to embrace corporate relief measures in the bill. Beleaguered shares of airlines, restaurants, and energy companies all posted massive gains as investors figured the bill might give those industries near-term economic support. Stocks added a second straight winning session Wednesday, the first back-to-back win for stocks since February 6(!!). Again, investors poured money back into the market’s most beaten-down stocks en route to a +1% daily tally. A third positive day came Thursday with a strong +6% showing by stocks. It was the same song, however, with the market’s laggard stocks receiving the bulk of the buying. The relief rally stretching into a third day certainly gave some life to the bulls, though most market watchers cautioned against reading much into the bear market rally. Friday brought a tighter trading day with stocks opening and closing within about a 1% range, much narrower than the recent swings. Stocks opened lower, giving back Thursday’s end-of-day surge and largely ran in place from there, closing off -3%. With the Congressional aid package now done, investors will turn toward the quarter’s earnings reports, which will begin trickling out in a few days. Company outlooks are sure to be hazy at best.
Stocks largely recovered the prior week’s hefty losses as buyers stepped in, emboldened by the aid package passed by Congress. The S&P 500 (SPY) rose +10.76% while the Nasdaq 100 (QQQ) recovered +8.80%. The small-cap Russell 2000 (IWM) posted a +11.44% gain.
Warm wishes, stay safe, and until next week.