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.
 

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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. 

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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.

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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. 

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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. 

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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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The stock market collapse has been shockingly quick and severe, causing considerable panic. However, as the charts illustrate, it has also significantly “re-valued” the overall stock market in record time!
 

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The collapse in the stock market in recent days has been swift, significant, dramatic and unnerving! And with the VIX volatility index still hovering near 27, who knows how much longer and how much deeper it may go?

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Fears surrounding the spread of the coronavirus spiked over the weekend bringing panic selling to the stock market. While the possibility of a global pandemic is frightening, anxieties have also been augmented because the 10-year U.S. Treasury yield is again nearing its all-time record low. 

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Since the 2008 Great Recession, economic and investment uncertainties have been persistent and pronounced. The shocking depth of the last recession during the post-war era (the annual decline in real GDP growth had never been lower than -3%—until 2009—when it fell nearly 4%), its subsequent subpar recovery (real GDP growth has averaged only slightly more than 2% annually, a level which was traditionally considered the “stall speed” during past expansions), the wild actions of policy officials (Cash for Clunkers, TARP, a zero Fed funds rate, Quantitative Easing, and Modern Monetary Theory)..

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A lot of moving parts of late. Record high stock markets with near record-low bond yields? A re-inversion of the yield curve. A pop in the U.S. manufacturing industry. Blow-out job numbers at full employment. Impeachment—Not. A botched Caucus. Brexit—Done. And, a Pandemic! Eh, just another day at the office…
 

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Volatility has always been important when investing. It is one of the most widely accepted qualifiers of risk. All investors prefer a steady-return stream rather than the anxiety which comes with irregular and less predictable returns. But often, volatility provides financial signals.

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Today, it was reported that fourth-quarter U.S. real GDP growth was 2.1%, nearly in line with expectations. However, business investment spending declined for the third consecutive quarter, continuing to raise fears that companies are pulling back and it is only a matter of time before they also reduce employment, sending the economy into a recession.

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Investing overseas has mostly been a black hole through this bull market. Price momentum remains terribly weak for international stock markets and this has given investors pause every time they consider reallocating some assets offshore. 

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Extraordinarily low bond yields—often negative bond yields outside the U.S.—have significantly elevated investor anxieties, leaving the impression of facing a high-risk, low-return world. Consequently, during much of the contemporary expansion, the existence of very low yields has pushed several investors toward a more conservative portfolio allocation. 
 

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Investors are wondering what will ultimately crack this stock market. Its rising trend of late has improved investor sentiment, which is not surprising given the abject fears evident last summer about an imminent recession. While sentiment has recently turned positive, it hardly seems broadly optimistic or ridiculously bullish.

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Geo-political conflicts, an oil crisis, impeachment drama, and an upcoming presidential election are all currently rattling the stock market. Yet, what really matters for stocks this year is profits. For the stock market to make sustained progress in 2020, companies’ bottom-line performance needs to show renewed life.

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Including those who are bullish for this year, few expect stocks to continue delivering superior returns during the next decade. The economic expansion and bull market are simply too long in the tooth, and valuations too extended, to produce another decade of solid results.

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