When the outlook is uncertain, it often helps to anchor our awareness in the present. A moment by moment reflection on events—non-reactive, non-judgmental, simply an open-minded observation—can draw attention to things previously hidden or reveal additional insights we may not have thought of otherwise. The secret to any future is here in the present.
It started like any other year. Wall Street strategists published their bullish forecasts with expectations for a market melt-up. Morgan Stanley’s Mike Wilson, the most bearish strategist, increased his target for the S&P 500 to as high as 3,500 in the first half of 2020.
The forward price-to-earnings ratio of the S&P500 had risen to the highest level of the decade-long bull market. The price-to-sales ratio was at an all-time high. However, based on price to cash spent on dividends and stock buybacks, Evercore ISI’s Dennis DeBusschere noted that valuation is in the bottom quartile of its history. “Earnings growth is set to reaccelerate.”
After years of indifference, trading volume at online and discount brokers exploded and small trader call buying jumped to 46 percent—the highest since October 2007, ahead of Dow’s 54 percent slide. Chatter on a Reddit message board was pushing up prices on some stocks and reshaping the options market. Tesla’s stock doubled in January.
On January 12, Chinese state media reported a “new viral outbreak” was first detected on December 12 around a seafood market in Wuhan, a city of 11 million people and a transportation hub. “The disease is preventable and controllable,” the government said. The timing of the outbreak could not have been worse as hundreds of millions of people were about to travel back to their hometowns for the Lunar New Year. About 7 million people left in January, before travel was restricted.
In America, President Trump signed a “phase one” trade deal with China on January 15, cooling tensions in an election year after months of escalating tariffs. His public approval rating hit the highest level of his presidency even with the ongoing impeachment trial in the Senate. “Trump as an incumbent benefits from the strongest tailwinds” since 1896, wrote Michael Cembalest of JPMorgan.
Barron’s magazine cover boldly stated, “Dow 30,000” on January 20, calling it “inevitable.” The Dow had a good year in 2019, up 25 percent, and was 2.2 percent away from the psychological round number. “How soon to 40,000?” the editors asked. But market breadth was deteriorating with the percentage of stocks making new highs actually falling.
On January 21, Chinese officials acknowledged the risk of human-to-human transmission of the novel coronavirus with outbreaks in Beijing, Shanghai, Tokyo, Singapore, Seoul and Hong Kong. The same day America confirmed its first case near Seattle. “We have it under control,” Trump said.
The world’s elite converged on Davos the next morning. Bridgewater’s co-CIO Bob Prince declared we have seen “the end of the boom-bust cycle” while Ray Dalio said “cash is trash.” Goldman economist Jan Hatzius called this period the “Great Moderation” and wrote that he sees the economy as “structurally less recession-prone today.”
On January 23, Wuhan went into lockdown. Controls stepped up elsewhere across China as hundreds of millions of people were placed in some form of isolation. The government requisitioned stadiums, exhibition halls, and other large venues as quarantine centers and built makeshift hospitals in a matter of days to keep up with the growing number of patients.
Amid thousands of new cases in China, now far exceeding the number of cases associated with SARS in 2003, the World Health Organization officially declared a “public health emergency of international concern” on January 30.
By the time America imposed an entry ban on Chinese travelers the next morning, it was too late. Outbreaks were already growing in over 30 cities across 26 countries and infecting people who had not traveled to China—the start of a pandemic.
On February 3, China’s stock market opened after a week-long holiday for the Spring Festival and plunged 8 percent as coronavirus fears took hold. US markets shrugged the decline. “The most compelling bull case right now is that there is no credible bear case,” wrote UBS strategist David Lefkowitz in a note to clients.
The Dow climbed to an all-time high on February 12, closing at 29,551. The S&P 500 peaked a week later at 3,393. “Highest Stock Market In History, By Far!” Trump tweeted. White House was considering tax incentives for more Americans to buy stocks.
The Economist’s cover on February 22 highlighted Big Tech’s bull run. The shares of the five biggest tech companies rose 52 percent over the previous year. Alphabet, Amazon, Apple and Microsoft were now each comfortably worth over $1 trillion. ARK Invest predicted Tesla could become the next $1 trillion company.
Source: Barron’s and The Economist
As China started systematically testing, tracing and isolating patients, new cases there declined dramatically, showing that it was possible to slow the virus. But the number of infections globally continued to rise at a rapid clip, inciting concerns about overrun hospitals and a stalled economy. “We have before us a crisis, an epidemic that is coming,” said President Macron of France. German Chancellor Angela Merkel told citizens 70 percent of the country’s population could become infected.
The virus, which had now spread to 47 countries, put pressure on business and supply chains around the world. By February 27, US stocks were down at least 10 percent from their record highs. Cracks started to appear in the junk-bond market, with the yield spread relative to Treasuries widening by a percentage point. Oil was down 27 percent.
President Trump failed to reassure investors over the coronavirus spread. “One day it’s like a miracle, it will disappear,” he said. Sen. Bernie Sanders was leading the pack of Democratic presidential hopefuls by double digits. Bargain hunters came out. It could be a “V-Shaped Market” said Barron’s.
As a pre-emptive move to protect the US economy, the Fed pushed through an emergency rate cut on March 3, the first since the collapse of Lehman Brothers in October 2008. Stocks rallied for about 15 minutes and then the selloff intensified. The 10-year Treasury yield dipped below 1 percent for the first time.
Trump economic advisor Larry Kudlow told CNBC on March 6 that people should immediately buy into stocks. He expressed confidence that the US economy was “sound.”
On March 9, Russia and Saudi Arabia abandoned efforts to support oil prices in the face of virus-related demand destruction. Oil prices crashed by the most since 1991, as much as 34 percent to $27. Yields on the 10-year Treasury plunged to 0.39 percent. The 30-year yield fell to 0.83 percent.
Xi Jinping visited Wuhan on March 10, signaling China’s confidence in curbing the coronavirus epidemic. Chinese medical workers celebrated the closing of more than a dozen makeshift hospitals. But thousands of new cases were reported in Italy, Iran and South Korea. The global number of Covid-19 cases surpassed 100,000.
On March 11, Dr. Anthony Fauci, the head of the National Institute of Allergy and Infectious Diseases, told Congress, “It’s going to get worse.” The actor Tom Hanks revealed that he and his wife have caught the virus and are quarantined in Australia. The NBA abruptly suspended its season. Universities moved all their classes online. The sobering reality set in that the coronavirus is going to severely disrupt life in America.
On March 12, the World Health Organization declared a global pandemic. President Trump addressed the nation from the Oval Office, announcing a new ban on travel from Europe to tackle the “foreign virus.” There had only been 13,000 tests in the US versus over 100,000 in South Korea.
European stock markets suffered steep losses, with Germany and France tumbling 12 percent. Italy was down 17 percent, the most on record. The Dow fell nearly 10 percent, its worst day since the 1987 market crash. Prime brokers increased daily margin requirements, worried an unprecedented number of hedge funds would hit their one-month loss triggers all at once. “Their performance is really suffering, and there have been margin calls,” one prime brokerage executive said. Bridgewater’s Pure Alpha Fund was down 13 percent for the month.
President Trump officially declared a national emergency on March 13. The Fed, in conjunction with central banks around the world, took drastic action over the weekend to contain the coronavirus’s economic fallout. The Fed cut rates to zero and launched a $700 billion QE program. Powell said there’s still “plenty of power left in the tools” should the crisis get worse.
The Dow fell 12.9 percent on Monday, March 16. The worst day in 1929 was a decline of 12.8 percent. Market depth virtually disappeared. The VIX index blew out to 83. The S&P 500 closed at 2,386, with less than 4 percent of stocks trading above their 200-day moving average. This was the fastest bear market ever, just 16 trading days after setting a record high on February 19.
Leaders of the Group of Seven said they will do “whatever is necessary” to ensure a globally coordinated response to the pandemic. The International Monetary Fund pledged to mobilize $1 trillion in lending capacity. Stocks continued to decline as President Trump admitted the US may be heading into recession and that the outbreak could last until July or August.
The Philippines became the first country to halt stock, bond and currency trading in response to the coronavirus pandemic. France, Italy, Spain and Belgium banned short selling. Barron’s came out with a “Crisis Playbook” with stock picks from experts “even if a recession is looming.”
Countries took aggressive measures to limit public movement, closing borders, shutting down retailers and ordering citizens to stay in their homes in an urgent effort to arrest the spreading coronavirus pandemic. Mosques closed, churches canceled masses, and the pope prohibited the public from Holy Week celebrations. “We are at war,” said Macron. “Never has France had to take such decisions, albeit temporary, in time of peace.”
In the 1940s, factories moved from producing consumer goods to turning out tanks and guns for the war effort on both sides of the Atlantic. Louis Vuitton owner LVMH pledged to use its perfume production lines to start making hand sanitizers. GM and Ford were said to be considered moves to start making ventilators instead of cars. China’s largest electric vehicle maker, BYD, became the world’s biggest mask producer.
The Dow dropped 17.3 percent, its worst week since 2008. The index rose or fell at least 4 percent in eight consecutive sessions. “What comes next is nearly impossible to predict,” wrote Jon Hill from BMO Capital Markets. “Things could get a lot worse before they get better,” JPMorgan’s Mislav Matejka noted. Eleanor Creagh, strategist at Saxo Capital Markets, recommended to “wait it out.”
The speed of the credit selloff was crushing. US investment-grade bonds had their worst month ever. Spreads on US high-yield bonds nearly tripled since the beginning of the year. The amount of distressed debt in the US quadrupled in less than a week to nearly $1 trillion. Yields on 10-year and 30-year Treasuries more than doubled from the lows.
There was a run on dollars despite the Fed providing trillions of dollars in liquidity and establishing swap lines with other central banks. The dollar index surged to its highest level in 18 years. The Mexican peso plummeted 30 percent in March. Spreads on dollar-denominated emerging-market debt surged to the highest levels since 2009. Crude oil dipped below $20. Wall Street economists rushed to declare the coronavirus has triggered a global recession.
JPMorgan wrote down its expectations for global GDP to -1.1 percent in 2020, including a second quarter contraction of 14 percent in the US and 22 percent in the eurozone. “It is easy to imagine a still worse outcome,” wrote Deutsche Bank chief economist Peter Hooper. Goldman Sachs sliced the S&P 500 EPS forecast to $110 for 2020, a 33 percent decline from last year given the “unprecedented” speed of business erosion. S&P Global Ratings said the default rate for junk bonds is heading to 10 percent over the next 12 months, more than triple the current rate.
“Until a vaccine is manufactured, distributed and injected we will go through a Depression-era period in the country,” Bill Ackman told CNBC. He called for a federally mandated nationwide shutdown over the next 30 days. “America will end as we know it unless we take this option.”
Governments around the world moved with determination to design economic stimulus programs to keep the worst from happening. The US conjured $1.5 trillion of stimulus, including industry bailouts and $500 billion of direct “helicopter” payments to households. Treasury Secretary Steven Mnuchin warned unemployment could reach 20 percent if the package is not passed. St. Louis Fed president James Bullard predicted 30 percent. Unemployment rose to 25 percent at its highest level during the Great Depression.
On March 23, the Fed announced that it would buy unlimited amounts of Treasury bonds and mortgage-related securities. The Fed also created two new programs to buy corporate bonds and shared plans to pump money into lending to consumers and small businesses. “The Fed is committed to using its full range of tools to support households, businesses and the US economy over all in this challenging time,” the statement read.
There were now more than 300,000 diagnosed cases of Covid-19, including over 55,000 in America and at least 800 deaths. Rising numbers continued to unnerve investors. A Bank of America poll of fund managers showed the biggest monthly drop in expectations for the world economy in the history of its survey, which dates back to 1994.
“It’s just hard to redeploy money at the moment,” said Leslie Thompson at Spectrum Management Group. “You almost feel numb,” said Craig Hodges of Hodges Funds. The Dow was off 27 percent in March and 35 percent for the year. Risk-Parity, CTAs, and active manager exposure to stocks fell 3 standard deviations below the norm. Deutsche Bank noted overall equity positioning is below 2008 levels.
We suspect there will never be a requiem for the longest bull market on record, simply because the pessimism will birth a new one before we have the opportunity to mourn it’s passing. The best guide is to expect the opposite of whatever now reigns in the public consciousness.