Quickest Bear Market Decline Ever
In the past few weeks many have been discussing how this bear market due to COVID-19 isn’t as bad as the 2008 financial crisis. The situation is inching closer to the financial crisis and further away from the mini bear market of 2018.
VIX closed above 40 for the 4th straight day. That hadn’t happened since March to April 2009. Wednesday was the worst day for bonds and stocks since at least 2002 based on the performance of the TLT and the S&P 500.
Prior to Wednesday, the S&P 500 had averaged a 1.3% move in the last hour of trading which ties the peak in 2011. But is way below the peak of 3.6% in October 2008. This isn’t as bad as 2008, but the distinction is becoming less obvious as the days go on.
NBA season has been canceled and all stores except grocery stores have been closed in Italy. Plus, President Trump stated he’s issuing a ban on travel from Europe to America for 30 days. These qualitative actions combined with the sharp quantitative declines in markets make it look like the current 19% decline in the S&P 500 won’t stand.
As you can see from the chart above, the Dow had its quickest 20% decline ever. It’s now in a bear market. This past 11 year bull market in U.S. stocks is officially over. News that’s occurring combined with the steepness of this drop makes it feel like a 20% decline isn’t close to how bad it will get.
The market has blown through all its traditional stops. CNN fear and greed index is at 4/100 which is extreme fear. Put to call ratio rose 40% to 1.02 which is extreme pessimism. There have been 7 down days of 3% or more in 2020. It’s about to be 8 on Thursday. There were 12 such days in 2009 and 23 in 2008. We’re on pace to beat 2008.
Recession Being Priced In
We could be looking at a 30% decline in stocks because it’s becoming clearer that a global recession is inevitable. While a U.S. recession isn’t locked in yet, the market is starting to price one in quickly. It has already priced in a full point rate cut from the Fed on March 18th. It seems silly for the Fed to wait until Wednesday to cut, but no matter when it cuts, stocks likely won’t care. They are more concerned with the odds of a fiscal stimulus and stopping the spread of COVID-19.
According to PredictIt, there is a 66% chance of a recession in President Trump’s first term which ends in the beginning of next year. UBS sees Q2 GDP growth being -0.8% which is recessionary.
As you can see from the chart below, the S&P 500 and the BBB spread are showing the odds of a recession are the highest since late 2018. Odds will soon pass that peak as the S&P 500 is most definitely going to fall more than 20% from the peak.
A Recap Of Wednesday’s Action
On Wednesday, the stock market gave back its gains from Tuesday and the long bond stopped rallying. This was a terrible day for the typical 60/40 portfolio. S&P 500 fell 4.89% as it is slightly below Monday’s close. The market is likely to fall further on Thursday, hitting official bear market territory. Nasdaq fell 4.7% and the Russell 2000 fell 6.41%. The ratio of small caps to large caps is the lowest since October 2002.
There was carnage in all sectors. Wells Fargo stock fell 7.84% as it now yields 6.31%. Boeing fell 18.15% and Norwegian Cruise Line fell 26.8%. Best sector was healthcare which fell 3.91%. All sectors are falling because people are panicking and some are being forced to sell.
Worst sector was the industrials which fell 5.95%. It was brought down by Boeing which is also the reason why the Dow fell into bear market territory before the other major indexes. As you can see from the chart below, the 21 day return correlations of large cap stocks is the highest since the Chinese forex crisis. There have only been a few other examples of this correlation going higher.
Prior to the rise in the 10 year yield on Tuesday, it had fallen 13 straight days which was its longest streak ever. The prior record streaks were 9 days. That explains why the 10 year yield rose on Tuesday and Wednesday even though stocks hit a new bear market low on Wednesday.
10 year yield rose 6 basis points to 87 basis points. However, it fell 6 basis points on Wednesday evening as the panic continued in the futures market. 30 year yield rose 11 basis points to 1.39%, but then gave 12 basis points back on Wednesday evening.
Coronavirus is in the process causing the entire U.S. economy to stop functioning as is the current case in Italy. NYC St. Patrick’s Day parade was canceled and March Madness, which is a college basketball tournament, is being played without fans.
In Italy there are now 12,462 cases and 827 deaths. There are 1,327 cases in America and 38 deaths. It speaks to the potential danger COVID-19 could cause that the economy is being shutdown even with only 38 deaths. That total will increase. The chart below shows the number of cases in Italy and America. America is lagging behind Italy. If it keeps following Italy, we could see all public schools closed next week.
A global recession is inevitable and a U.S. recession is now likely. I hate to be this gloomy, but there’s no way to avoid a recession if the economy shuts down.
Good news is if you have cash available, you will be able to take advantage of amazing prices. With the market down 19%, prices are good, but this isn’t a once in a life time buying opportunity. If the pace of this decline continues, we could get such an opportunity in the next few weeks.
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