Coronavirus Pushes Stocks Into First Bear Market In Over A Decade

The Dow Jones Industrial Average closed in bear market territory, which means it’s down 20% from the recent peak. It also happens to be the all-time high.

The other major indices will join the bear market club this morning.

• S&P 500 -4.89%
• Dow Jones Industrial -5.86
• NASDAQ Composite -4.70%

For the S&P 500, yesterday’s closing level was potentially a good support point, even if for a session or two. But now, the next big support point could be 2,416.  We are now in a period of panic, which means stocks will get extremely oversold.  Over the next month, many of these stocks will hit bottoms, which will seem obvious later.

Hand Holding

I remember in March 2009 when so many names were trading as if they were going out of business, and people were still selling.  I can’t express my frustration for not buying Avis (CARS) at $0.40 – yes, forty cents, and then watching it rally to $69.00 by August 2014.   It always feels so simple after the fact instead of in the midst of these swift selloffs clouded by the unknown.

We do know other nations have curbed the spread of coronavirus and we do know mortality rates are very low for working age folks.   There is a chance warmer weather, coupled with decisive actions to mitigate the spread will also be effective.  But that brings us to the economic consequences, which are dire in the short term.

From the very beginning, attempts to slow the virus have hit the stock market more than the virus itself.  

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Another part of stock market reaction is confidence in elected officials and institutions designed to come together to intervene during periods like this.  There hasn’t been the coordinated effort many thought would happen last week, and nations have differing views on what works and what doesn’t. 

In Germany, Angela Merkel said over time, 60 to 70 percent of the population will get the virus, and there is no need to erect borders or stop the flow of folks from places like Italy.  In America, President Trump has decided to ban most passenger traffic from Europe, mirroring a decision to limit passenger traffic from China early on – a move most acknowledge was prescient.

There is no doubt Wall Street wanted to hear more details on bailouts and writing checks. 

Still, there is huge worries Congress will go on break without getting anything through that provides immediate relief for those most vulnerable to the deliberate stalling of the economy.   That would be a shame.  That would be criminal.  Meanwhile, the ECB did not cut rates this morning as everyone expected.  Instead, the European Central Bank is pumping money into banks in hopes those banks will lend.

The ECB is also buying €120 billion in additional assets.

European markets moved lower on the news, which is far less dovish than anticipated.  But these actions might be better medicine for the ECB and European banks, which are not nearly as well-capitalized as American banks.

American Banks

Yesterday, the heads of the largest US banks underscored their fiscal strength and ability to be effective during an economic downturn. There was unanimity about helping small businesses through loans, extended payment plans and waving fees. The most important comment was “this is not a financial crisis.”

In addition, Brian Moynihan of Bank of America said activity was “still strong,” especially in mortgage areas. Another banker said millennial spending is holding up very well. JP Morgan says it’s made $26.0 billion in loans to consumers and small businesses over the last 40 days, even in Seattle.

Watching Bond Yields

Lost in yesterday’s equity sell off was the serious rally in the ten-year bond yield.  Plunging yields have set the tone for the plunging stock market. So it’s really intriguing that major stock indices were hammered, as the ten year yield rallied 10%, and the spread with the two year yield widened significantly.

Valuations are cheaper and will get cheaper.

My pledge is that we are here to hold your hands and make sure people make rational and informed decisions during these periods. Panic is the biggest mistake no matter how painful.  I hope everyone has some cash and understands they’ll have to take some losses to be prepared.  I’m also excited about the chance to make money as the dust settles and that goes beyond fundamentals.