Stock Market: Why The Longest Bull Market In History Might Be Followed By The Shortest Bear Market In History

(Drivebycuriosity) - We are experiencing a new bear market for stocks. This bear market started on Thursday March 12 when the S&P 500, the gauge for the US stock market, plummeted to 2,480.64 points and finished the day 26.7% below the all-time high from February 19 (chart below). A drop of at least 20% defines the end of a bull market and the beginning of a new bear market. The 16-session plunge into a bear market was the quickest in the S&P 500’s history, writes The Financial Times ( ft.com). This bear market will end when the S&P 500 climbs more than 20% above a former trough. The new bear market might be the shortest bear market in history. The record is held by the bear market of 1990, which lasted just 3 months ( apnews). It was caused by sharply spiking oil prices as a result of the 1st Iraq war.

It seems paradox, but the deeper and the faster stocks drop, the sooner a bear market ends. A new bull market starts when the S&P gains more than 20% from a former trough. At the moment, the calculation basis is from Monday March 23, when the closing value of the S&P 500 dropped 2.9% to  2,237.40 points, about 33% below the peak. In this case the S&P would need to climb above 2,685 points to reach bull territory again. If, in the coming days, the S&P 500 closes even deeper then the basis of the bull market would begin from a lower value.

The charts above show that stock markets often snap back after an extreme fall. It seems there is an invisible rubber band. This phenomena can easily be explained. In the final bear phase the market often overshoots - driven by panic & accelerated no thanks to short selling. Hedge funds and other speculators borrow stocks only to sell them immediately as a bet on lower prices. But suddenly the panic wave rolls over,  bargain hunters are attracted by sharply reduced prices & valuations, short sellers start buying back, new information dampens pessimism, people become tired of listening to the prophets of doom and panic will ebb down. We observed the invisible rubber band in the beginning of 2019 when the market snapped back after the Christmas 2018 panic and in the spring of 2009 when the big meltdown turned suddenly into a steep recovery rally (charts above).

 (bloomberg  )


This time the stock market might have overshot again. The crash is overdone, driven by panic & massive short selling - not anymore by fundamentals. The market is oversold and due for some recovery. Today stocks are already pricing-in worst case scenarios. There is talk that in the US 50% will be infected and everything will be shut down for many months. Based on what facts? In China the crisis has already peaked and the Peoples Republic is slowly going back to work. Korea & Japan also are reporting falling numbers of new corona cases. Even in hard hit Italy & Iran the curves of new cases are flattening.

I think that quarantines, travel bans, the temporary closing of factories & gathering places (pubs, gyms, restaurants, beaches etc), social distancing and cautious behavior (intense hand washing, fewer body contacts etc.) will flatten the curve and constrain the epidemic in the US. We are already seeing this in China, Korea, Japan & Taiwan. Warmer weather in the coming months could also help to slow the contamination ( marketwatch).

It is unlikely that the US will experience the international definition of a recession which is two quarters of falling GDP back-to-back. 2020 started on a solid foot with record low unemployment & solid retail sales. On March 18th, the Federal Reserve Bank of Atlanta, which uses all available information, still calculated a GDP growth of 3.1% for Q1 (frbatlanta ). The second quarter GDP might shrink but the 3rd quarter should already show a recovery and a positive GDP growth rate, so the US should miss the international definition of a recession.

The economic carnage by COVID-19 is immense in the moment and the coming weeks. We see sharply slowing business investment, in many regions people aren`t  traveling, aren`t visiting bars, nightclubs, concert venues or restaurants, but on the other hand, consumer spending for rentals could be immune to the virus, consumer spending for health services is spiking and government spending is exploding (there is talk about a $6 trillion stimulus, including the $2 trillion from Congress and $4 trillion from the Federal Reserve Bank).

There is also a big fundamental change going on. We learned from China that more people are working, learning & shopping from home which is fostering digitization and raising efficiency & productivity of the economy ( driveby ). Online sales in the US are already surging, more people are binge watching Netflix & Amazon Prime, listening via Spotify, reading Kindle books, surfing Facebook & Twitter and businesses are running more & more on cloud computing. Amazon already hired 100,000 people to deal with the exploding demand and Facebook reports explosive demand.

Following the experience from China, Korea & Japan it is likely that we will experience an economic air pocket in last days of March and in April (many businesses are closed and the panic buyers will consume their huge provisions they are amassing now), but in May we may already notice some signs of economic recovery driven by the internet sector which is currently booming. Ultra low oil prices & interest rates will also support the recovery by reducing transportation costs (shops still need to be filled and online purchases still need to be delivered) curbing the costs for those who still are working & commuting or will restart it.

The stock market is always forward looking. As soon as the market notices that things don´t get worse it will recover. When the news flow becomes less depressing buyers will jump back and stocks will rally led by the internet sector.