The record-long bull market, which for 11 years has dodged existential threats from trade wars to real wars, is now confronting a risk that it might not be able to overcome: the coronavirus.
A drumbeat of negative news about the spreading virus’ negative impact on the economy, which led to heavy selling and a trading halt early Monday after the broad market fell 7%, has put the U.S. stock market on the precipice of its first bear market since the financial crisis.
A bear market is defined as a drop of 20% or more from a prior closing high. At the Standard & Poor’s 500 low of 2,740.35 Monday morning, it was down 19% from its Feb. 19 record high of 3,386.15.
The financial fallout from the coronavirus has been fast and furious. The spread of the deadly virus around the globe has frozen economic activity in parts of China and Italy, prompting economists and stock market pros to raise the odds of recession to reflect a world where consumers are hunkering down, avoiding public places, traveling less and curtailing spending.
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The plunging Dow Jones industrial average – which was down by more than 2,000 points in trading Monday — is a symptom of a battered market trying to handicap how bad the coronavirus-led hit to the economy will be. Other signs of trouble include today’s 20% drop in oil prices and the yield on the U.S. 10-year Treasury—known as a haven in tough times—falling to a new record low of 0.38%, down sharply from its recent 52-week high of 2.67% in March 2019.
It’s not officially a bear market yet, but it sure feels like one.
“Where do you begin on a day like today?” Craig Erlam, senior market analyst at OANDA Europe noted. “It’s absolute carnage out there.”
“Is this the start of a bear market? In my firm’s eyes, we say, ‘yes,’” says Michael Foguth, founder of Foguth Financial Group in Brighton, Mich. “The coronavirus, the election, the interest rate decreases, (and plunging) oil prices are all reasons we believe this (is a bear).”
Trading action is expected to stay volatile until Wall Street gets more clarity on how many people are infected in the U.S., what steps government policymakers may take to both contain the spread of the virus and assist businesses hurt by economic disruption, and what the long-lasting damage to corporate earnings will be.
What’s a bear market?
So, what is a bear market? It is a period of declining stock prices in which a broad market gauge like the S&P 500 falls 20% from a prior high. Bears normally are caused by a recession, black swan events like the coronavirus, wildly optimistic investors, ridiculously overpriced stocks or interest rate shocks that cause economic contractions. These downdrafts are normally accompanied by rising investor fear levels as losses mount.
The current sell-off has been sparked by massive uncertainty caused by the coronavirus. The market hit fresh highs less than three weeks ago but has been overtaken by the negative coronavirus headlines.
Today’s rout and the 1,000-point Dow drops in recent weeks had all the hallmarks of panicky investors trying to avoid losses.
Whether Monday’s massive sell-off after the opening bell represents any type of short-term bottom is difficult to know, market experts say.
“News is often terrible at a bottom and likely will get worse,” Mark Arbeter, president of Arbeter Investments, said via e-mail. “The bottom will come when the market starts to ignore the negative headlines.”
If – and it’s still not certain it will–the S&P 500 drops 20% and a bear market becomes official, it would mark the end of good times on Wall Street. On average, these bear market drops, which are feared by investors, last 21 months and result in 40% declines, according to an S&P Dow Jones Indices analysis of the 13 S&P 500 bear market since 1929.
The continued slide in stock prices means the pain in investor portfolios is spreading and adding up to real money. An investment of $100,000 in the S&P 500 at the market peak on Feb. 19, was worth about $18,700 less at the market’s intra-day low Monday.
After more than a decade of rising stock prices aided by cheap money and zero-percent interest rates provided by the Federal Reserve, the market is undergoing a violent shakeout. That’s because the coronavirus has led to both a supply and demand shock to the global economy, a kind of “economic freeze” that causes sales and earnings to contract.
Investors fear a recession is looming. And the recessions aren’t stock market-friendly. In the past 12 recessions since World War II the S&P 500 has tumbled an average of 27% in a top-to-bottom decline that lasts 13.5 months, CFRA data show.
While the Fed announced an emergency rate cut last week to shield the economy from the negative drag caused by coronavirus panic, it hasn’t been able to arrest the market’s fall. Monetary policy is not viewed as the best tool to combat a crisis of confidence caused by the coronavirus. Cheaper money might be able to reduce market dislocations, but it can’t stop the spread of the virus or create a vaccine.
Wall Street is looking for the U.S. government to issue fiscal remedies, such as low-cost loans to small businesses, payroll tax cuts to put more dollars in workers’ pockets, and other measure to ease the financial fallout on Main Street and Wall Street.
Few stocks have been spared from the rout.
A list of some of the companies in the blue-chip Dow already mauled by the bear reads like a Who’s Who of American business: Boeing; JPMorgan Chase; Exxon-Mobil; American Express, Goldman Sachs; Walt Disney. All are down 20% or more from their highs.
Spreading pain in the stock market
The market pain is widespread. In other signs of trouble, the technology-packed Nasdaq, which had been leading the market higher, was down more than 19% from its February peak at Monday’s market low. The Dow was off more than 19.
Small-company stocks, measured by the Russell 2000 index, which is often viewed as a proxy for how much risk investors are willing to take, briefly dipped into bear territory Monday, tumbling more than 20% from its recent high.
Oil is also in a bear market. West Texas Intermediate crude, was down nearly 20% at midday, or roughly 46% lower than where it began the year.
Overseas stock markets from Tokyo to London are also getting battered.
The list of worries and uncertainties confronting investors seems to be growing as the coronavirus spreads. As a result, investors are selling and looking for cover in safe havens like U.S. Treasury notes, cash, bonds and gold.
The Fed is expected to cut rates sharply again at its meeting next week. And investors are hoping the panic selling has crested, and that the market can avoid the panic selling that has shaved more than 5,700 points off the Dow in less than three weeks.
Several economists and investment pros have already hinted that a bear market is looming.
“The bull market … will gradually succumb to the spread of the coronavirus and the weakening economy,” Sung-Won Sohn, a business economist at SS Economics and professor at Loyola Marymount University. told USA TODAY.
While Jonathan Golub, chief U.S. equity strategist at Credit Suisse Securities, expects the current market decline to “largely reverse” by year-end, taking the S&P 500 back up to 3,300 (or roughly 18% higher), he won’t rule out more pain, which could lead to a bear market.
How bad can things get?
It is impossible to predict how far stocks will fall and when they will hit bottom. But a review of past bear markets provides a guide of what investors can expect.
First the good news. While the average bear has sliced 40% off the S&P 500, some bears are tamer by comparison. In the 1990 bear, the market fell exactly 20% before rebounding. And the bears in 1956-57 and 1966 both suffered losses of less than 22%, according to S&P Dow Jones Indices.
However, the past shows bear markets can create far more destruction. In the 2007-09 bear set in motion by the 2008 financial crisis, the S&P 500 cratered nearly 57%. And after the Internet stock bubble burst in 2000, stocks fell 49.1%.
And while this month’s steep stock decline has been scary, it would take a true market collapse for the S&P 500 to match its record-setting 86.2 percent mauling it suffered from 1929 through 1932.
What will stop the market from going down?
Bear markets normally end when investors get so scared that everyone who wants to sell does so, providing a safer entry point for buyers. A peak in panic is also a signal, as is a belief that prices have fallen to bargain levels. Lower stock valuations could also get brave, opportunistic investors back in the market.
Markets might also rebound once investors get proof that fears of an imminent recession might be offset by a V-shaped economic and corporate profit rebound if the world gets back closer to normal after the virus stops spreading.
“The more positive recent developments, including evidence of successful virus containment in Asia, higher potential disposable income for consumers, fiscal and monetary loosening, and more favorable equity valuations—may take time to feed through into market pricing,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a research note. “That said, we continue to see opportunities for investors to enhance and diversify their portfolios and build positions for the long-term.”
What’s an investor to do?
Navigating a bear market is treacherous, as once the declines have reached 20%, there’s always a chance that the worst of the drubbing has already occurred, yet nobody can say whether the current plunge will morph into a major rout of 30% to 40 %.
And timing the market is a difficult strategy to execute, market pros say.
Long-term investors, or those saving for retirement 15, 20 or 30 years down the road, have less to stress about than Americans closer to retirement. Bear markets of the past look like blips on stock market charts that show steep rises over long periods of time. This recent bout of volatility, no matter how bad it gets, will also likely be long forgotten by the time investors retire in 2030, 2040 or 2050. Buying stocks when they are way down from their highs could prove profitable over the long run.
“A time is coming where there will be unbelievable, generational bargains in key energy stocks and perhaps other stocks, too,” David Bahnsen, chief investment officer at The Bahnsen Group in Newport Beach, Calif., noted in an email. “But investors just have to brace for impact until more cards are on the table. Drastic actions in either direction are imprudent.”
Buying the dip in the short-term, he added, could lead to both good and bad outcomes in the days ahead.
“Buying the dip is entirely a matter of an investor’s particular risk appetite and tolerance,” Bahnsen said. “There are reasons this market can rally violently off of the carnage. And there are reasons we drip lower as recessionary fears linger into the second quarter.”
History says that despite the short-term pain, the stock market eventually rides out market storms, which means jittery investors should try to focus on long-term trends that will fuel gains in the years ahead. It’s unlikely that coronavirus will undo many trends already in motion, like telemedicine, electric cars, digitization, 5G, robotics and artificial intelligence.
For those who need access to their cash sooner, however, it might make sense to dial back some of your risk exposure to stocks.
One strategy is to take some losses now and use those losses to offset income on your tax return for the 2020 tax year and put the proceeds of the stock sales into a money market account.
The truth is, that in the short term, when stock prices are in free fall, cash is the best line of defense. Cash protects you from a declining stock market. And in times of market stress, so-called capital preservation is more important than capital appreciation.
Haefele of UBS offers some portfolio strategies to consider.
You can boost the yield in your portfolio, he said, by buying dividend-paying stocks with strong balance sheets. Investing in so-called “green bonds,” which are less tied to the economy and oil prices, is another strategy to consider.
Investments in traditional havens, such as gold and long-term U.S. Treasuries, are another risk-averse strategy to employ. And for longer-term investors, Haefele recommends using the big price drops in stocks to “buy into long-term themes,” such as developments in health tech, genetic therapies, and connectivity.
Nancy Davis, chief investment officer at Quadratic Capital, summed up the market this way in an email. “The word of the day is contagion,” Davis said. “The biggest fear investors have right now is that this sell-off is different than others.”