Advisors.LeutholdGroup

This has been a “speedy” Bear Market. Measured through the first 22 days of all bear markets in post-war history, the contemporary bear market declined by almost 6.5 times more than all the others! In 2020, the market dropped 32% in 22 days versus an average of just -5.1% for the previous 13 bear markets. See Paulsen’s Perspective “Recession By Proclamation!” posted on March 23rd.
 

We didn’t see the coronavirus coming and, like millions or perhaps billions of others, underestimated its likely economic impact when it began to spread. But stock market risks were high well before the virus hit.

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The U.S. economy is in free-fall, perhaps headed for its deepest recession of the post-war era. Typically, recessions are necessary to correct overindulgences that build up during an expansion—for example, restoring liquidity, improving savings, purging bad debt, and realigning exorbitant risks. In the economic recovery that just ended, however, there were very few excesses or problems that needed to be addressed. 

While the bull didn’t live to see his 11th birthday, this month did mark the anniversary of another historic event: Twenty years ago this week saw the peak bubble-era close in the S&P 500 of 1,527.46. 

At its recent low on March 23rd, the S&P 500 had fallen much faster and by much more than any bear market in post-war history during its first 23 trading days. Indeed, it was off by about -34%, more than six times greater than any bear market post-1945. 
 

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U.S. recessions are normally caused by private sector vulnerabilities. During an expansion, private players eventually get out over their skis, overdo risky behaviors, and expose themselves.

As deep as the losses in the DJIA and S&P 500 have been, most professional investors recognize that those averages have masked the extent of the damage suffered by most stocks.

While it’s possible that Monday’s S&P 500 low of 2,386 will represent an important trading low, we believe it is too early to expect the market to form a major bear market low.

Overnight Tuesday, stock market futures hit their 5%-limit down trigger—this has become commonplace in the current crisis. Seemingly, in addition to the coronavirus, the stock market is also worried about rising bond yields, which many believe is occurring because governments around the globe are implementing massive fiscal-stimulus packages and, consequently, are poised to sell huge amounts of sovereign debt securities. 

The recent market turmoil has only served to exacerbate equity style trends that have been in place for years, with Value, Small Caps, and High Beta all underperforming relative to Growth / Momentum, Large Cap, and Low Volatility, respectively. 

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With the markets in freefall, we’ve seen a dramatic spike in interest in our monthly “Estimating the Downside” vignette. We think a mid-month snapshot is in order to give some idea as to how much meat has been taken off the valuation bone.

A pandemic sweeping across the globe leaving unprecedented human turmoil in its wake, while also abruptly freezing economic activities, has brought the longest bull market in U.S. history to a crashing and swift end. Wow! Unfortunately, investment textbooks offer little advice on the situation and this rapid change of events seems far from over. 

The collapse of U.S. Treasury yields and the simultaneous end of the bull market has produced a new all-time record for the S&P 500, albeit under less-than-desirable circumstances.

There are of course many differences between today’s stock market and the 1987 panic. However, in both cases, the economy was at or near full employment and generally healthy going into the crash.

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Fear fills the financial markets! Although the frightening and unpredictable coronavirus is the headliner, investors are nearly as freaked out by the recent speedy collapse in the 10-year U.S. Treasury bond to a record low yield below 1%! Is the unthinkable, possible? 

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