Published April 3, 2020
There are many stories already in this bear market. Below, we present a few that might be of interest. First, we take a look at our focus index, the Nasdaq 100 (QQQ). The line across the middle notes the price point ($195) where this index broke out back in November to begin a four month rally. That breakout ran fast and hard. We now trade below that breakout point. In fact, it served as a point of resistance (aka net selling) to halt the most recent rebound effort.
That same breakout point line looks a whole lot different for the S&P 500. Like the QQQ, the S&P 500 also now trades below that breakout line. However, for the S&P 500, getting back to that line is a long haul. It’s nowhere in sight. The S&P has fallen so much further in terms of historical price progress. We are now back to the S&P 500 value of late 2017.
At their worst, the stock market indexes have all fallen -30% or more during this selloff, easily qualifying for “bear market” designation. How long do bear markets last? The table below tells us the average is about 12 months. However, it matters whether the bear market is occurring in the midst of a recession or not. In a recession, the bear takes 18 months to cycle through – e.g. go from market peak to market low. The recovery time can also be much longer in a recession – 30 months compared to 10 months without a recession. Both the 2000-2002 and 2007-2009 bear markets took at least four years to fully recover from. We expect that the current bear market will be found to occur in a recession, leaving us looking at an 18 month average. We are a couple of months into it at this point.
With such a bad start to the year, we wondered whether we could maybe sidestep further downside and at least expect a choppy but flat market going forward. The data says otherwise. The table below shows us that the six instances where the market has shown losses in January, February, AND March, the market has gone on to also post losses for the remaining nine months of the year. The only exception took place in 1982, which was notable for being a major turning point in the stock market. After a long bearish period, stocks went on an 18-year bullish run from 1982-2000. This data all points to history suggesting we are looking at a negative rest of 2020.
Shifting gears and looking at credit/bond markets, we measure risk avoidance in the market by looking at the spread between “safe” bonds (U.S. Treasuries) and riskier high yield bonds. On the left side of the chart below, we see that during the financial crisis (gray band), the spread spiked such that investors were requiring high yield bonds to pay them +20% over and above the interest rate/yield on Treasury bonds. For comparison, on the far right of the chart, in the current market struggle the spread has peaked at just over +10%. It could get a lot worse.
Every bear market is different, of course, and the structural financial troubles at the root of the 2008 crisis do not appear to be nearly so present today. Banks are much better capitalized, for one. And the Federal Reserve is already much more aggressive than they were in the prior crisis. Many of the tools implemented by the Fed over the past month were not rolled out until late in the 2008 crisis. In short, the Fed is a much larger and more aggressive participant in market stabilization this time around. That may put a floor under market prices. But it won’t stop the damage that will occur from a global economic shutdown. It is the prospect of that damage, its duration and depth, that investors are now trying to sort out. Unfortunately, it will likely be months before investors even begin to see clarity on those issues. The upcoming corporate earnings season is bound to be marked by companies unable to provide any accurate view of the future, as their businesses reel from such a dramatic and sudden change in demand and supply. As the collection of data above shows, we likely have many months of uncertainty and volatile markets ahead of us.
Market Update
This week, bullish investors hoped for some follow-through on the prior week’s rebound. Monday delivered a +3% gain to keep the hopes alive. Stocks were led by healthcare shares on the upside, while energy shares continued to follow oil prices further into the tank. Stocks closed the books on a horrendous quarter Tuesday by giving back -1.6%. The negative tone prevailed Wednesday as well. Remarks from President Trump regarding possible death tolls from the coronavirus appeared to sap any enthusiasm investors might have had for starting a new quarter. Stocks slid to a -4% loss on the first day of April. A sharp rebound in energy shares, however, provided a +2% lift to stock indexes Thursday. The potential for a truce in the Russia-Saudi Arabia oil supply battle sent oil prices and energy shares soaring Thursday. But Friday brought a dismal monthly jobs report leading stocks back downward by -1.6%. 10 million Americans have filed for unemployment over the past two weeks, an unprecedented number. The impending economic damage from such a sudden and negative shift in employment remains a heavy cloud over any market rebound efforts.
Stocks held on to a good chunk of the prior week’s rebound. The S&P 500 (SPY) lost -2.06% while the Nasdaq 100 (QQQ) slipped -1.04%. The small-cap Russell 2000 (IWM) continued to swing more wildly, losing -7.05% and giving back almost all of its prior week advance.
Warm wishes, stay safe, and until next week.