A reporter on Bloomberg earlier in the week commented that fear was not yet present in the markets. Global stocks have seen enormous selling pressure, but it is not until the hedges and safe-haven assets also trade lower simultaneously that fear is then present. In other words, everything is red. Certainly there may be a degree of subjectivity to that call, but I like the premise.
In this selloff/correction/decline, we witnessed that for the first time on Wednesday the Dow Jones Industrial Average and the TSX officially entered bear market territory (which is a 20% decline from their most recent high). The S&P500 joined them Thursday. On Wednesday, the price of the US 10 Year Treasury was also lower. Whether that’s anomalous or warning it could get worse is to be seen. The most challenging angle to this entire market action though, which is exemplified by the quick and drastic price moves, is deciphering this as a transitory shock or a recession incurring serious economic damage to consumer confidence and employment.
In just a week, consensus shifted to the latter.
I had written a blog last Sunday morning to be sent out at the beginning of the week, but for the above reason the piece was rendered irrelevant by the time the markets opened. The topic was on distinguishing the signals the markets were telling us. Particularly whether the bond market was pricing in rates cuts or a more extreme scenario including recession. The second point was on then being careful with the parallels that were being drawn to 2008. Beyond analyzing the virus impact, there is now an oil supply-shock entering the equation.
Numerous unknowns remain. Front and centre are the potential spread of this virus and the associated impact to economic activity. Trying to determine this almost seems like a rogue’s game at this point. Many of the more opportunistic analysts suggested that this health scare was no less manageable than previous pandemics (from an economic perspective) and the markets would see past it. But, the probabilistic scenarios still seem wide ranging, as illustrated by stock markets struggling to maintain a bid. Factoring in the destabilising effect of the energy shock to the credit markets and the effect on the real economy is whats driving the increasing concerns with recession.
To add to my obsolete (and unpublished) content, one key distinction worth making to 2008 and the Global Financial Crisis is the abandonment of multilateralism. Beyond whatever one’s preferred politics, it seems President Trump’s global led shift to a more unilateral approach seems less effective, or alternatively an audience less receptive. In 2008, it was a coordinated effort between monetary and fiscal stimulus to support the global economy. This last couple weeks has seen a communique from G7 nations that saw central banks follow in an uncoordinated fashion that is yet to see any effect.
The concern is that this deglobalization affect will create more dislocations and more market fragility. Without Western Powers acting in sync, there is the opportunity for more frictions and much more volatility. To illustrate this, Goldman Sachs Wednesday morning suggested the S&P500 could fall another 15%, but then rebound into year end by 30%. Buckle up.