Monday Morning QB - Market Observations:
- The Dow & S&P 500 Indexes are Officially in Bear Market Territory
- Fear-Based Uncertainty is Driving Extreme Volatility
- The Coronavirus is New; Bear Markets are Not - It’s Been 11 Years Since Our Last Bear Market…Violent Swings are Part of Bear Market Cycles
- Crude Oil Collapses in Price War Between Saudi Arabia and Russia…This Alone would Be Enough to Scare Investors
- Fed Cut Interest Rates on Wednesday and Sunday
- Fed Funds Rate is Now 0-.25% • Fed Also is Trying to Stabilize the Credit Market Adding Over $1 Trillion in Overnight Liquidity
- The Fed Will Restart Quantitative Easing Program Used during the Great Recession
- President Trump Declares a National Emergency Over the Coronavirus
- Current Economic Reports are Meaningless…No One is Looking at the Past Economic Data for Future Guidance
- The Economic Impact is a Major Question - How Bad will it Get and For How Long?
Monday Morning QB - Market Performance:
Despite the late-day rally on Friday, the stock market ended the week in Bear Market Territory (Down 20% from the most recent High).
The Dow Jones Industrial Average finished the week down 2679 points to 23,185 - a decline of -10.4%. The technology-heavy NASDAQ Composite, likewise, gave up 700 points, a loss of -8.2%.
By market cap, the large-cap S&P 500 experienced a decline of -8.8%, while the mid-cap S&P 400 and small-cap Russell 2000 plunged a much larger 14.0% and 16.5%, respectively.
Bear Market Chaos Begins!
Stocks are suffering from two market shocks at the same time.
Last week stocks suffered historical losses as fear concerning the effects of the coronavirus outbreak gripped the U.S., compounded by a destructive price war in the oil industry between Russia and Saudi Arabia.
During the week, the declines pushed the major indexes well into Bear Market Territory with the Dow Jones Industrial Average falling over 28% from its recent peak to its Thursday low and the S&P 500 Index down about 27% as of Thursday’s close.
The stock market hit another unwanted benchmark as the onset of this Bear Market was the fastest in history.
It was only a month ago that the stock market was hitting new highs! On Thursday, the Dow suffered its worst daily decline since the “Crash of October 1987”.
The use of trading “circuit breakers” became a regular event last week.
The purpose of the circuit breakers is to stem panic selling. The intended effect of the breakers is to halt trading when the S&P 500 falls by more than 5% and then 7%, allowing people to take a breath and decide if selling just to sell is really in their best interest.
It is hard to turn the herd once fear-based selling starts!
The circuit breakers were triggered on both Monday and Thursday for the first time since 1997.
They will be triggered again before the stock market opens this morning.
It's Bad Everywhere!
International markets suffered from the chaos as well. Canada’s TSX declined -15.2%, while the United Kingdom’s FTSE 100 retreated -17.0%.
On Europe’s mainland, France’s CAC 40 and Germany’s DAX each plunged 20.0%, while Italy’s Milan FTSE plummeted -23.3%.
In Asia, China’s Shanghai Composite lost -4.9%, while Japan’s Nikkei ended down -16.0%.
As grouped by Morgan Stanley Capital International, developed markets fell -14.3%, while emerging markets ended down -10%.
How Long Do “Event-Driven” Bear Markets Last?
Not all bear markets are the same.
Goldman Sachs analyst Peter Oppenheimer analyzed bear markets going back to 1835 and classified them as either “structural,” “cyclical,” or “event-driven.”
The coronavirus pandemic is considered an “event-driven” bear market.
The S&P 500, so far, from peak to bottom, is off 27%. As you can see in the chart below, the average decline for an event-driven bear market is 29%.
Perhaps last Thursday was the worst of it. One could only hope! Unfortunately, we will not know how bad this bear market was until we are looking at the coronavirus in the rearview mirror.
The chart does provide some solace but only from an investment point of view. Event-driven bear markets are typically shorter in length than structural or cyclical bear markets.
According to Oppenheimer’s research, event-driven bear markets generally regain their previous levels within 15 months compared to structural and cyclical bear markets, which suffer drops, on average, of 57% and 31% and take much longer to recover.
The Federal Reserve has been busy enacting emergency monetary policies in at attempt to get in front of what they expect to be a monumental economic slowdown.
Congress has already adopted a spending bill and will likely pass a relief bill early this week.
The next step is likely a bailout bill. No one in Washington likes to use the term "bailout" but this is what it is.
We bailed out the banks under President Bush and the auto industry under Obama. Both, after the fact, became political footballs, but both were necessary.
The role of government is to step in when shocks occur to lessen their impact.
Real lives, real people are at the end of these bailouts, and they need (and needed) help. There will be plenty of time for political shenanigans once we are back to normal.
For now, President Trump will likely bail out the oil industry, the airline industry, and the hotel and leisure industry.
A fiscal stimulus, in addition to the monetary stimulus provided by the Federal Reserve, will create an all hands-on deck approach!
During bear markets, everyone is affected in some fashion, so the sooner we can get out of a bear market, the better.
A Reminder to Our Clients
We began raising cash within your portfolios at the end of January.
Most of you fall into a range of 0%-25% of your portfolio in stocks, depending on your risk tolerance. Raising cash has limited the losses within your portfolio.
By having a more substantial cash position, less of your money needs to absorb losses before making money again.
The headlines are scary, and no one likes to experience loss. However, some amount of loss is a natural part of investing.
Patience is required because volatility is the cost of building wealth over time!
According to First Trust economist Brian Wesbury, as of last Thursday the S&P 500 was pricing in a decline of corporate profits of 60%-80%. Wesbury pointed out that during the Great Recession, the corporate profit decline was around 50%. Do we expect this to be worse than the Great Recession of 2008 – 2009?
As discussed above, event-driven bear markets are typically much shorter than structural bear markets.
By raising cash and limiting the losses to your portfolio, we expect to eventually come back into the stock market at lower prices compared to the February high.
"Buy Low and Sell High" is typically proven to increase portfolio wealth over time.
Remember, “You Don’t have to Earn Back what You never Lose.”
During Bear Markets, it is also prudent to cut back on purchases and, if possible, limit the amount of distributions from your portfolio.
We are here to help you, in any way we can, to manage your way through this current crisis! Do not hesitate to call us if you need to discuss your individual portfolio.