Bear Market Or Overdue Correction?
Monday Market Recap
Highlights
Markets decline 12% into correction territory as coronavirus cases spread outside of China and begins to hit US. This was the fastest correction from market highs since 1980. (WSJ)
Private Equity Firm Elliot Management looks to push Twitter CEO Jack Dorsey out of Twitter, the company he co-founded.
The Fed looks to cut interest rates in March as a result of the Coronavirus and with 10 year treasuries approaching close to 1%. The current fed funds target rate stands at 1.5%-1.75%.
Global markets have been gripped by fears over the impact of the epidemic. Market attention to the outbreak has shot up to levels higher than those seen during the SARS epidemic in 2003, according to positive vs. negative text analysis of broker reports and the financial press (see chart below). The drag on economic activity may threaten to push some developed economies – such as Japan and the euro area – toward the brink of a technical recession (defined as two consecutive quarters of economic contraction), though current economic data doesn’t necessarily show a recession coming to the U.S. or globally.
The overall level of economic activity is likely to step down for 2020 as the outbreak is becoming an increasingly global public health threat. I expect a rapid rebound in activity once disruptions dissipate, but still see a great deal of uncertainty around the extent and pace of the deceleration. These include the outbreak’s eventual reach, the public health measures taken in response, and how long the outbreak and these measures last. One key signpost to watch in the near term: How successful will China’s effort to restart its economic activity be – and can it avoid another round of mass infection as workers return? This may provide insight on the potential duration of the outbreak - and its economic impact – elsewhere.
With elevated trading volume, a tightening of financial conditions or lack of market liquidity could be met with policy easing by major central banks but many, such as in the euro area and Japan, have limited space left to give, particularly with rates already at negative or close to zero. Fiscal policy will likely also be an important part of the toolkit for China.
What I’m Reading -
How to Respond to Covid-19 According to Bill Gates
The Bill and Melinda Gates Foundation has pledged over $100 million to assist in the fight against COVID-19. The foundation has had previous experience in fighting similar types of diseases and in working with governmental and world partners such as the WHO, CDC, and local partners on the ground.
Bill’s plan involves protecting countries who have yet to experience the virus along with rapid and continuous support of the scientists currently working on developing a vaccine against COVID-19.
What I’m Watching –
F1 – Drive To Survive Season 2
Formula 1 Racing is known to be one of the most dangerous sports while simultaneously pushing the boundaries of skill and speed. If you are not a fan of Formula 1 racing, you will be after watching this series.
The ten-part documentary series is the first time in the sport to really go underneath the “man in the helmet” along with an inside look at the various racing teams and how they strive to be the very best. Season 1 covered the 2018 World Championship and Season 2 follows the 2019 Formula One World Championship. This time with Mercedes and Ferrari in the mix.
View the trailer here (warning explicit language) and as a bonus here is a world record pit stop performed in 1.82 seconds from the very same season.
What I’m Listening To –
92Y Talks - Ezra Klein with Malcolm Gladwell
Anytime I see a Malcolm Gladwell Interview or new book release I tend to tune in. His comical storytelling ability combined with his interrogative journalistic approach tend to produce incredible insights, even within the most mundane of topics.
Here, he sits down with Ezra Klein, founder of Vox Media, to explore the how and why of American politics. How has it become so polarized around identity, why the system has become so toxic, why we participate in it, and what it means for our future.
Tune in on Apple or Spotify Podcasts.
Quick Take
Is the recent decline a sign of a bear market or just a typical market correction? Analysis surveying the past 65 years of the S&P 500 and the past 27 years of the MSCI All Country World, finds that sharp initial drops are hallmarks of run-of-the-mill corrections, defined by declines of between 10% and 20% in equity prices.
On average, recovery follows within six months, and a rally within a year. By contrast, bear markets typically start with deceptively gentle drops and take 12-18 months for recovery. Given my most recent post of an overvalued market this recent selloff puts us more closely in line with levels from 2019 prior to the back half rally that sent the market finishing 30% for the year. This looks more like a step in the right direction of reality, while fears on the virus are largely oversold.
We will be waiting for financial data to really quantify the economic impact of the virus, but look for a quick return to business as usual once vaccines are released and the spread begins to be contained.