Stock Market: Flirting With The Bear

 (Drivebycuriosity) - The bull market for stocks, which started March 2009, gets tested again. Today the S&P 500, the gauge for the US stock market, dropped intra#day to a temporary low 2,707.32 points. That was 20.5% below the all-time high the index had reached in February. A drop of at least 20% defines the end of the bull. But a mediocre sprint in the final minutes lifted the S&P 500 to a closing price of 2.741.38 points, out of bear territory again.

This week`s turbulence is a sequel of the meltdown on Christmas Eve 2018, when the S&P 500 also flirted with the bear, and of a violent drop in summer 2011.

The recent losses are caused by a wave of pessimism & hysteria, aggravated by massive short-selling (borrowing stocks and selling them immediately in the hope to repurchase them later much cheaper) as usual. There are some political groups who are happy with a crash and a bear market because sharply falling stocks could reduce the chance that President Trump will be reelected in November. Some people might celebrate the recent sell-off - and they might even helped it by massively short-selling.

Anyway, the melt-down and a new bear market is unfounded. “The stock market has predicted nine of the last five recessions” joked once economist and Nobel prize winner Paul Samuelson (wikiquote ). The coronavirus won`t push US economy into as recession, even though some political groups would benefit from that. China`s economy is already recovering, thanks to a swift & aggressive response (morningstar).

I am aware that the virus - and measures against like quarantines - have some negative effects in the overall economy. Big events like .. or .. got cancelled or postponed, airlines, cruiseship owners, hotels & restaurants are suffering. But these are located effect. There are already some strong very strong counter-movements.

Oil prices are under pressure. Brent Crude & WTi, the futures for global & American oil, dropped about 50% since. There are 3 reasons for that. A rising oil glut, thanks to American fracking, the fear that coronas reduces oil demand (less traveling) and a price war started by the Saudis to wipe out US competitors.

Dropping costs for gasoline & natural gas work like a giant tax cut. The price war on the oil market is a gift for the global economy. Imploding oil prices are a huge stimulus program because consumers have more money to spend and corporations have less costs. Therefore consumer spending, which is about 70% of the US GDP, should stay robust. Spending for renting should be immune to the virus, spending for health care might even rise. People might travel less, might go out less and visit fewer shops & restaurants, but they may shop more online and many might work from home.  It is possible that the virus - and measures against it like quarantines - alter the behavior. We learned from China that there more people are working, learning & shopping from home which is fostering digitization and so rising efficiency & productivity of the economy ( driveby ). I believe that the negative coronavirus impact on real income, employment, industrial production and retail sales will be constrained and short lived - shorter than a quarter - and will be be followed by a v-shaped recovery. The numbers from China where the new cases dropped sharply are encouraging. There won`t be a recession.

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Interest rates also have been falling sharply (chart above). Lower costs for consumer credits, mortgages support investments & consumer spending. I assume that the double package of cheaper energy prices & credit costs will compensate most of the perilous impulse of the corona epidemic.