Thursday, March 12, 2020

It’s a Bear Market. Now What?

On March 11, 2020, the Dow officially entered a bear market when it closed at 23,553.22 more than 20% below it’s all-time high of 29,9551.42 on February 12, 2020. It took less than a month for the bear to appear, but bear markets are often quick and steep, whereas bull markets are longer, sustained rallies.

While the Dow gets the headlines, I prefer looking at the S&P 500, which is also on the precipice of reaching bear territory. This morning markets dropped 7% (and triggered a second circuit breaker pause this week). Unless the S&P 500 claws most of that loss back before the end of the day, it will also reach bear market status. Must it happen? No: five times since 1976, the S&P 500 has declined 19+%, but not reached the “magic” 20%-loss threshold. I wouldn’t bank on today being the day that makes this number six.

In my blog two days ago, I suggested, “Stock market volatility is caused by uncertainty” and “[the markets’] real concerns are the economic effects of government policies to contain the virus.”

Some of that uncertainty was cleared up during President Trump’s speech last night, but not much. The key takeaways are:
  •        To limit COVID-19 cases from entering the U.S., he’s suspending travel from Europe (excluding the U.K.) for 30-days.
  •         Health insurance carriers have agreed to not charge co-payments for COVID-19 treatments.
  •         The president has promised to take emergency action to provide financial relief for workers who are ill, quarantined, or caring for others due to coronavirus. He supplied no specifics regarding what this aid would look like or when he would take the action.
  •         He’s asking Congress to approve $50 billion of additional funding to the Small Business Administration to make low-interest loans.
  •         The IRS will extend tax-filing deadlines for undefined individuals and businesses (to temporarily provide additional liquidity to the system.
  •         He requested that Congress enact immediate payroll tax relief—something congressional leaders from both parties have already suggested has little chance of passing.

So why the negative reaction from the futures markets? I’m not them, so I can only guess (which is what they’re doing as well!). The major problem is that much of the uncertainty is unresolved, and what was resolved is not good news for corporations.

  •       The lack of specificity demonstrates the Federal government is still behind the curve, reacting instead of being proactive. How much financial relief can people expect? What will be the fiscal stimulus effect of the aid? How quickly will it appear? The speech felt like something the President had to do but didn’t want to do.
  •         That the president continued to push payroll tax relief is a negative reminder of Trump becoming fixated on his preferences and his inability to find larger, unifying solutions to issues.
  •         No announced agreement between the White House and the House of Representatives on legislation. (Sen. McConnell has already said the Senate will wait for legislation from the House.)
  •         No mention of targeted relief to affected industries: The 30-day ban on most European travelers will hit airlines, hotels/motels/resorts, restaurants, ridesharing, etc. The trickle-down effect will be significant.
  •         No mention by the president that kits will be available to test anyone who needs it. No assurances that the health care system is prepared for a surge of new cases or what the government is doing to help them prepare.
  •         And in after speech news, the NBA suspended their season after one of its players tested positive for coronavirus. (This after the NCAA announced March Madness games would take place in empty arenas.)

In short, we have reached a point in the U.S. virus cycle where most of the news will be bad. The drumbeat will be depressing, and more people will react by reining in the ways in which they physically interact with others. More areas of the country will experience their first case, bringing the disease closer to home for more people. Case numbers will rise, as will deaths.

More event cancellations will make the news. Businesses have already cut back on travel and meetings. One after another, colleges and universities are moving to online classes. Some, like Harvard, are trying to empty their dorms as much as possible. Actions taken in Washington State to restrict congregations of people will be adopted elsewhere as pockets of COVID-19 appear.

The certainty of negative outcomes has caused the market decline. The uncertainty will cause further market volatility—both up and down. Based on that, I don’t think we’ve yet seen the bottom of this market cycle.

Some clarity for the markets will occur when the House passes its legislation. That clarity may be good or bad for the markets, but my guess that soon after that, we are likely to see volatility begin to dampen.

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James M. Jackson authors the Seamus McCree series. Full of mystery and suspense, these thrillers explore financial crimes, family relationships, and what happens when they mix. False Bottom, the sixth and most recent novel in the series is set in the Boston area. You can sign up for his newsletter and find more information about Jim and his books at

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