I’ve simply run out of words to describe what has gone on. There has been no shortage of human and historical events and reactions impacting the globe’s financial markets over the past few weeks.
It seems like the greatest bull market in history, spanning over 11 years, may have transformed into a bear market in but a mere 16 trading days. Is that possible?
The way central banks have reacted with monetary stimulus never seen before, on top of the fiscal stimulus from governments all over the world, we must be in the middle of not an “unprecedented” crisis, but an “existential” crisis. We must be because that is what the policies seem to be indicating:
It seems like the greatest bull market in history, spanning over 11 years, may have transformed into a bear market in but a mere 16 trading days. Is that possible?
The way central banks have reacted with monetary stimulus never seen before, on top of the fiscal stimulus from governments all over the world, we must be in the middle of not an “unprecedented” crisis, but an “existential” crisis. We must be because that is what the policies seem to be indicating:
- A US stimulus package at over $2.2 trillion, coming in at 10% of US GDP, and twice that used to help during the 2008-09 Great Recession / Financial crisis
- The ECB in Europe lowered interest rates to the lowest ever and expanded their balance sheet at record levels
- The US Federal Reserve has followed suit to the ECB to zero rates and huge asset buying taking the Fed’ balance sheet to about $6 trillion.
So if it looks like a duck, walks like a duck, and quacks like a duck…then it must be a duck…so the central bank intervention and government announcements are telling us that we are in the greatest crisis we’ve ever seen. Bigger than World Wars, natural disasters, days like 9/11, past viruses, etc. … it is possible that this pending economic slowdown will reflect the sharpest decline in economic activity on the planet Earth since the Great Depression in the late 1920’s.
The US economy was on track to grow at around a 3.0% annual GDP rate. That as they say, is history. The first jobless report in the crisis came in at over 3.0 million jobs lost…in a week. To put that number in perspective, the peak for any week during the Great Recession of 2008-09 was 665,000. The record high was 695,000, in October 1982. I had started with RBC in August of 1982, so I remember it well.
The US economy was on track to grow at around a 3.0% annual GDP rate. That as they say, is history. The first jobless report in the crisis came in at over 3.0 million jobs lost…in a week. To put that number in perspective, the peak for any week during the Great Recession of 2008-09 was 665,000. The record high was 695,000, in October 1982. I had started with RBC in August of 1982, so I remember it well.
Small businesses and large corporations alike are collateral damage in the war on Covid-19, as economies are shut-in to slow the spread of the contagion. We haven’t seen anything like this even during the Spanish flu of 1918, the Asian flu in the late 1950’s, or the Hong Kong flu in the late 1960’s, all of which rank right up there in their impact on health of the populations.
Just this week, investment firm Goldman Sachs (GS) forecasted that they believe the US economy will contract 35-40% on an annual rate in both March and April, stabilize in May, and then…perhaps…start growing again. The truth is, as bright as the people are at GS, at this point, given the unprecedented nature of the event, any forecasts that are being tossed about, positive or negative for that matter, are simply a best guess.
For more perspective, the fastest drop in real GDP in any quarter in the post WWII era (so 73 years since 1947) was Q1 of 1958 when the US was hit by the Asian flu and fell at an annualized rate of 10%. So that number GS is tossing about is HUGE one.
Just this week, investment firm Goldman Sachs (GS) forecasted that they believe the US economy will contract 35-40% on an annual rate in both March and April, stabilize in May, and then…perhaps…start growing again. The truth is, as bright as the people are at GS, at this point, given the unprecedented nature of the event, any forecasts that are being tossed about, positive or negative for that matter, are simply a best guess.
For more perspective, the fastest drop in real GDP in any quarter in the post WWII era (so 73 years since 1947) was Q1 of 1958 when the US was hit by the Asian flu and fell at an annualized rate of 10%. So that number GS is tossing about is HUGE one.
The news in the near term will most likely get worse, and will include:
- Business closures (some for good)
- Job furloughs/ lay offs / lost for good
- Continued supply chain disruption
- Shortages of necessities
- Continued pressure on the health system
There are several different types of economic recovery that we could see moving forward, a “V” shaped recovery would mean a relatively quick rebound, however, if it’s going to be a more pronounced downturn with a bigger effect on earnings and the economy, we could see an “L” shaped “hockey stick” type looking recovery, a slow “U shaped recovery, or a “W” shaped one with fits and starts. It is too soon to tell what we will see for sure.
So the bull market which turned 11 years old just at the beginning of this month will not make it to 12. The reality is that no one knows with certainty what the eventual impact of the coronavirus will be on markets and the economy. In the last 93 years, the Dow Jones average has had 13 bear markets (defined as declines of 20% or more). At the low seen so far, it was down 35%. Only twice in those 13 instances did the economy not go into a recession.
So while this crisis has been a “punch to the face” for our societies, our health, our economies, for some, perhaps a longer retirement date, and yes, even a “punch” to portfolios, they’ve always recovered nicely.
So as we wait for the virus numbers to peak, we have to remember that coming out of it we will have the biggest stimulus ever seen on the planet, and it’s both in the form of monetary and fiscal stimulus. The markets had built in a pretty bad scenario. What to look for? A momentum low. Although this is a typical pattern, each bear market has been different, and it is not wise to generalize. Yet in past cycles we have seen markets form a momentum low as an indicator of the turn. This is followed by many weeks (or in this case, maybe months) of base building, followed by perhaps a retest of lows, and then finally a new bull market. Yes, it will take some time for the markets to regain their health.
One of the positives coming out of this cycle is demographics. It is a fact there are 36% more millennial households emerging in the 30-45 year- old age bracket the next 10 years than there were Gen-Xers the last 10 years. This group does most of the household formation, having babies, car buying, home buying, etc.… and that can have a huge multiplier effect on economic activity going forward.
So the bull market which turned 11 years old just at the beginning of this month will not make it to 12. The reality is that no one knows with certainty what the eventual impact of the coronavirus will be on markets and the economy. In the last 93 years, the Dow Jones average has had 13 bear markets (defined as declines of 20% or more). At the low seen so far, it was down 35%. Only twice in those 13 instances did the economy not go into a recession.
So while this crisis has been a “punch to the face” for our societies, our health, our economies, for some, perhaps a longer retirement date, and yes, even a “punch” to portfolios, they’ve always recovered nicely.
So as we wait for the virus numbers to peak, we have to remember that coming out of it we will have the biggest stimulus ever seen on the planet, and it’s both in the form of monetary and fiscal stimulus. The markets had built in a pretty bad scenario. What to look for? A momentum low. Although this is a typical pattern, each bear market has been different, and it is not wise to generalize. Yet in past cycles we have seen markets form a momentum low as an indicator of the turn. This is followed by many weeks (or in this case, maybe months) of base building, followed by perhaps a retest of lows, and then finally a new bull market. Yes, it will take some time for the markets to regain their health.
One of the positives coming out of this cycle is demographics. It is a fact there are 36% more millennial households emerging in the 30-45 year- old age bracket the next 10 years than there were Gen-Xers the last 10 years. This group does most of the household formation, having babies, car buying, home buying, etc.… and that can have a huge multiplier effect on economic activity going forward.
It’s a tough balance between choosing between the public’s safety and future economic welfare. Once those restrictions are removed, combined with the entrepreneurial nature of the western world, and with the tailwinds of stimulus never seen before, I do believe it won’t take long for those animal spirits to rise again.
We will still have a few tough days / weeks ahead of us, but every week passed is a week closer to a recovery.
Stay tuned,
Vito and Eric
This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under license. © 2020 RBC Dominion Securities Inc. All rights reserved.
We will still have a few tough days / weeks ahead of us, but every week passed is a week closer to a recovery.
Stay tuned,
Vito and Eric
This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under license. © 2020 RBC Dominion Securities Inc. All rights reserved.