Beijing time, March 23, this unnamed crisis reminds investors of the catastrophe in the early years, sorts out historical clues, and provides guidance for the situation that the market and the economy may face.
Although many observers and investors warned of global health and economic threats in the early stages of the COVID-19 outbreak, the U.S. economy was shutting down rapidly and the U.S. stock market plummeted 30% in a month, which is not something many people can foresee, because they have not been wary of the market for other reasons.
In fact, the severity of the stock market sell-off is so extreme and rare that no one dares to predict in detail.
investment-grade corporate bonds have a risk spread soared from record lows to roughly the same level as the default rate during the recession. S&P 500 Index -day fluctuation range reached or exceeded 4%, setting a record after World War II.
John Roque, a technical strategist at Wolfe Research, noted that the S&P 500 index on March 12 was at least 22% lower than the 50-day average on the 85th day since 1929. March 12 is the day when various indicators have shown the biggest downward pressure on the economy so far. In those days, 65 days were the Great Depression of 1929-1940. The rest are the financial crises in 1987, 2002 and 2008.
This extreme downward momentum usually occurs in the most unselected and strongest liquidation phase of bear markets—when the largest proportion of stocks are blindly sold out, when volatility reaches its peak. But so far, this is by no means the moment when the index itself reaches its lowest point, usually a few months later, sometimes even a few percentage points later.
vs. history
Analysts have been sorting out previous relatively undiscussed periods when the global flu pandemic occurred simultaneously with severe market declines. When the Spanish flu pandemic occurred in 1918, the stock market fell sharply by 33%, and it took two years to recover. However, the most destructive global war to date also broke out at that time, so its comparableity with today is questionable. "Today, we may see a stronger rebound as we will take a more aggressive fiscal and monetary policy response. We may also see a milder rebound as consumers and businesses ease liquidity pressures, either due to the long-term negative impact of the corporate bond market, or due to the unusual liquidity-driven negative correlation between stocks and long-term interest rates."
These characteristics remind Barry Knapp, managing partner of well-known investment institution Ironsides Macroeconomics, recalled the unpleasant but brief recession of 1980. "Just like March 1980, the government put the economy into a recession, trying to solve a puzzle. The problem in 1980 was severe inflation, and the government's restrictions on credit put the economy into a brief and severe recession, but with little success. By 2020, the economic contraction may be greater than the 8% decline in GDP (second quarter of 1980)."
For many, the 2008 crisis had the most profound impact, both because economic trauma is still vivid in my mind and because we see some of the same obstacles and breakdowns that are damaging the circulation system of the capital markets.
The premise of the trillion-dollar investment strategy is to weaken volatility, sufficient corporate credit demand, the reverse relationship between stock and bond prices, and sufficient liquidity is released.
All non-cash assets were exchanged for cash, and even ordinary money market funds were exchanged for safer treasury bond money funds. The Fed is now the last buyer of U.S. Treasury bonds, commercial paper and municipal bonds. Fixed-income exchange-traded funds (etf) have deviated from their underlying assets as investors flock to the market faster than the funds sell assets.
Positioning trading lows
All of this helps to aggravate volatility and trigger panic signals, which is at least a factor in the market positioning some kind of trading lows—even in disordered and fragile markets.
As for stocks, they are still relatively easy to sell.In this economy, huge losses in financial, commercial and human capital are increasing day by day. The prices of publicly traded stocks and corporate bonds are the most direct way to record such losses.
Analysts tracking various systemic fund activities now say leveraged stock bond “risk parity” participants have basically completed their clearing, pulling stock exposure to the lows of the financial crisis, a small net benefit for the stock market to expect some relief.
Hedge funds following the trend have made a lot of shorting this market, which makes sense and remains a source of downward pressure unless or until a major rebound or policy moves break the adverse feedback loop they are in.
We are now in that the market needs to rebound as soon as possible to break the mechanical selling spiral trend. In this case, even a fast and violent rebound of 10-15% looks just a mechanical rebound on the chart.
If the S&P 500 cannot stay near 2300 points, the next technical target of 2150 points will not look that scary, as it "just" fell 6.7%, less than half of the loss last week.
