Stock Market: Will The Longest Bull Market In History Be Followed By One Of the Shortest Bear Markets 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 also one of the shortest bear market in history. The record is hold by the bear market 1990, caused by a sharp oil prices spike as a result of the first Iraq, which lasted just 3 months (apnews).

It seems paradox, but the deeper and the faster stocks are dropping, the sooner a bear market will end. A new bull market starts when the S&P gains more than 20% from a former trough. The calculation basis is in the moment the closing value from Monday March 16, when the S&P 500 dropped 11% to 2,386 points. In this case the S&P would need to climb above 2,863 points to reach bull territory again. If the S&P 500 closes in the coming days even deeper than the bull market would start at a lower value.

 ( source )

The charts above show that stock markets often snap back after an extreme drop. In the final bear phase the market often overshoots. Then the panic wave rolls over and bargain hunters are attracted by sharply reduced prices & valuations, short sellers, who have borrowed stocks and sold them immediately as a bet on lower prices, will buy back, new information will damp pessimism, people will get tired of the prophets of doom and the panic will ebb down. We observed that in the begin of 2019 as the market snapped back after the Christmas 2018 panic and in spring 2009 when the big meltdown  turned suddenly into a steep recovery rally (chart below).

( source )

We might have reached again an overshot situation. I think that the recent stock crash is overdone, driven by panic & massive short selling - not by fundamentals any more. 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 months. Based on what facts? In China the crisis has already peaked - Apple reopened all shops there - and the Peoples Republic is going back to work. Korea also reports falling numbers of new corona cases. 

I think that quarantines, travel bans, closing 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. We are already seeing that in China & Korea. Warmer weather in the coming months could also help to slow the contamination (marketwatch ).

In the coming weeks the economic carnage will slow business investment, people won`t  travel,  won`t visit bars, nightclubs, concert venues & restaurants, but consumer spending for rentals should be immune to the virus and government spending is exploding (huge stimulus programs are in the making, there is talk about $trillion and more). Consumer spending for health services is also spiking - and so are online sales, binge watching on Netflix & Amazon Prime, listening Spotify, reading Kindle books, surfing Facebook & Twitter and businesses are running more & more on cloud computing. Amazon already hires 100,000 people to deal with the exploding demand and Facebook reports explosive demand (seekingalpha ). 

Following the experience from China it is likely that in April we will experience an economic air pocket (many businesses are closed and the panic buyers will consume their huge provisions they are amassing now), but in May we might already notice some signs of economic recovery driven by the internet sector which is currently booming. 

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