Bears Rout U.S. Stock Markets with Biggest Down Day Ever
Up until this week, the Dow has never lost 1200 points in a single day. We’ve done this three times this week, including hitting the new record on Thursday where we lost 10%.
We use a 20% decline to define a bear market, although this is just an arbitrary number and we could have chosen 15% or 25% if we wanted to. There isn’t anything magical about 20%, but once the word “bear” becomes officially used, the very mention of the word can serve to scare investors, especially those who remember the last real one in 2008.
We lost over half of all market value back then. Today’s situation may be far less ominous, but the level of fear in the streets far exceeds that or anything we’ve ever seen.
The last time we touched 20%, this was driven more by annoyance than fear, although at that time the fear was that the Fed would continue to raise rates, which had already shaved a big chunk off of U.S. GDP and more of this was certainly not welcome.
The Fed changed their mind though, so the market did as well, and 2019 not only erased these losses but achieved a double-digit gain on top of this. The bleeding stopped at exactly 20%, where we got to peer into the bear’s eyes for a brief time but the bear quickly ran away.
The 2020 bear is much angrier and much scarier. We touched bear market territory on Wednesday, and in its first full day on the job, our bear swatted us down by a further 10% in the biggest one-day loss points wise ever.
We already broke the record for this Monday, and didn’t just break it, we shattered it. The old record was 1190, set just this last February 27, and Monday’s trading simply blew that away by handing us a 2013-point loss. We upped the ante on Thursday with an awe-inspiring 2352-point drop.
Not long ago, the market hit what we call a correction level, which kicks in when we drop 10% or more. We had some sell-offs in 2019 but never hit a correction level, and these things don’t happen very often. On Thursday, we experienced a correction-level loss in a single session, the fourth biggest percentage loss in one day in history.
The only three that have been bigger were Black Monday, where the 22.61% loss that day was one for the ages, and a couple of sessions during the 1929 crash. The Black Monday record may last forever, over two times Thursday’s loss, but the current bear is not a one and done one, and has shown itself capable of numbers like this with a little time, as in this week.
We are already down a bear-sized portion of 20% this week so far, but the week isn’t over, and we are at risk of surpassing this Black Monday number on Friday, as we only need a 2.7% down day for that. Only losing 2.7% would be one of the better days lately, in a week that already hosts the three biggest point losses in history.
The force behind this sell-off is simply a wonder to behold. We’ve given back $10 trillion to this virus that has the world gripped in panic, and with the fear increasing with each passing day, there’s no telling how much lower we can go from here until we finally get a grip on things and see just how much more we have punished stocks than they deserve.
No one doubts that the market reaction to the coronavirus outbreak is extremely excessive, especially among the fundamental analysts that think stock prices are somehow set by business performance. We would hope that this incident would wake them up a little more to the idea that stock prices are completely subjective and are driven fundamentally by beliefs, but that might be like expecting a leopard to change its spots. These spots are tattooed on these analysts.
The lesson to be had here is that we do deviate quite a bit from these business numbers quite a bit normally, and while we never deviate this much, to produce an oversold condition this much at odds with what they call reality, this phenomenon goes on all the time and is the reason why their predictions differ from what happens so much.
When this does finally stop, it won’t be fundamentals that bring us back, it will be the effect of the sheer panic that the world and the markets are both under dissipating that will do it. We will look at dips in earnings, and this will at least give us a way to quantify the economic effects of this virus, but it will only be when this panic dies down that we will finally hit the bottom, and the great majority of this 30% drop so far is fear driven.
Given the degree of this panic, where somehow, we have projected what is a fairly meaningless virus outbreak in the grand scheme of things into a real monster that knows no limits of absurdity, as this panic persists, this effect alone can keep us going down until it finally starts to turn. This will happen, but we’re not there yet, and there could be two weeks or more of this bear running the show.
When Health Authorities Lose their Minds, They Become a Big Part of the Problem
It doesn’t help when you have authorities such as Dr. Anthony Fauci of the NIH telling us that this virus is 10 times more deadly than the common flu. It is, but what he forgot to mention is that, so far, the incidence rate of the flu happens to be 30,000 higher than the coronavirus so far.
In order for this to catch up as a threat, we would need to hit 5 million cases in the United States, and at that point, we could say that COVID-19 would be as deadly as something we don’t normally give much thought to at all, let alone something that we would take such drastic action against.
You would think that this would have been worth mentioning, but perhaps not if the goal is to scare. We’re also seeing projections such as 75 to 100 million Americans getting this, and if that were the case or anything remotely close, we would have a real epidemic on our hands, a scenario equal to what happened with the Spanish flu, with up to a million people lost.
Perhaps they are getting this huge number from the infection rates with the flu, which does affect this many. This is just not valid though, and anyone who extrapolates these flu numbers and assumes that they are applicable to COVID-19 are just not thinking straight, to put it kindly.
If we did not have a big canary in this coal mine, China, we might not even want to question these numbers very much. We do know from China’s experience that COVID-19 that this does not spread anywhere close to how influenza does, with only 80,000 of their people becoming infected, a number that has virtually stopped now. They only had 21 new cases yesterday, a typical amount lately, and the situation is all but over there. They hit 80,000 on Mar 1 and it will still take a while yet to get to 81,000.
We need to ask ourselves how it would be possible for China, where the event started and where the biggest concentration of infected parties resides, to only get 80,000 infections, where the United States could get 75 to 100 million cases? The U.S. has less than a quarter of China’s population, so this number even getting to 80,000 would be enough of a stretch, but one that pales in comparison to 1000 times greater than this.
If you’re afraid enough, you can miss such absurdities as you look to hunker down and wait for this viral apocalypse to arrive. Each day brings more cases, and even though we may only be adding a few hundred more each day toward this 100 million, every case has us more and more afraid.
Even though cancelling public events may be today’s equivalent of wearing tin foil hats to ward off cosmic rays, on a personal level anyway, this will surely help in stemming the advance of this, even though it does come at a real economic cost. While China took some big measures to keep it from spreading over there, which did inflict some real economic damage, we never expected such a reaction in the West, or how this issue has taken over the lives of so many to the extent that it has.
The biggest goal here is to look to manage this panic, and while curtailing large gatherings serves to stoke the fire, there is no doubt that this will slow down the growth of this virus at least somewhat, taking us to the day that we can finally calm down a little quicker at least. This is where we need to get to for this to come to an end.
Nothing else seems to be working. People were very afraid of treasury yields continuing to drop, but as we told you a couple of days ago, we saw the bottom of this market for now and yields have risen for three days in a row now. Many are surprised by this, but these are the folks that don’t know that much about bond markets, even though they claim to.
Traders just weren’t interested in driving these yields any lower, and that’s the whole story here, as opposed to the way that many think bond prices tell us, as some sort of glimpse into the future of interest rates like an oracle would provide. We have had far greater economic pain than this, real cuts from a knife as opposed to the paper cut that this virus has caused, and when you see treasury yields blow away the records on the low side, it surely cannot be economic conditions that are primarily behind the move.
While treasuries are starting to inch away from the extremely oversold levels that we saw on Monday, corporate bonds got hit very hard on Thursday, losing 5% on average. We are panicking about companies’ stocks, and this panic has now turned on their bonds.
We mentioned at the end of last week that although gold is normally a hedge against bear markets, it was too volatile on the down side to be safe to be in right now, and that sure came to pass as gold has given back almost $140 an ounce this week so far, with $100 of this loss coming since Thursday’s open.
People were clamoring for a fiscal response to this threat, and even though they are planning on opening up the vaults, the most that this has been able to provide us this week is a little pause from going down. We get more news of more cases and then go right back to panic mode.
Another issue that has been around for longer than this, since last fall, has been the lack of liquidity in the repo markets, used to fund the day to day operation of banks. The Fed added a good amount of liquidity to this market recently, in the famous quantitative easing that wasn’t really quantitative easing.
On Thursday, the Fed added an incredible $1.5 trillion of liquidity to the market, which did cause a big spike up in stocks for a brief time, only to see this be erased and then some by this virus fear that is getting stronger by the day.
Being Afraid to Run Away is the Craziest Fear We See These Days
All of these things in combination on Thursday were not enough to keep us from losing 10% in a single day, which tells you just how fierce this virus panic is. These positive actions are all indirect influencers, and the only thing that might help besides waiting this out is if the Fed were allowed to buy stocks.
If they could do such a thing, this would serve to provide at least some stability to the market, especially if they could sell off some of the treasuries that they hold and buy stock indexes instead, which would also solidify the bottom in yields. In the end, this would not only push stocks up quite a bit, they could actually make quite a bit of money from this by throwing a few trillion dollars into the market at today’s depressed prices and sell them later once this is all over.
If the Fed is really concerned with stock prices, which they shouldn’t be because this really doesn’t have much to do with the real economy that the Fed is sworn to protect, they could hold stocks on their balance sheet alongside treasuries and use it to fight bears. This is an idea that is so far away from the reality of today that even the coronavirus monster would not be enough to bring this idea to life or even have it seriously considered.
It doesn’t matter though, because things will be fine once this is all over, which is only weeks away. We’re ignoring the numbers with this generally so it should not surprise us that we’re not only exaggerating the magnitude of this but the duration as well, where this is seen as persisting for years or maybe forever even though it has been resolved in China already, with South Korea moving closer and closer to containment each day now.
Some believe that the loss of wealth that this sell-off has caused is a huge problem, and if the losses were more permanent, this would indeed be a big worry, but given the temporary nature of this sell-off, this isn’t even worth thinking about. The Fed influences the stock market indirectly by way of its actions on the economy itself, but in a world that has gone so mad, where actual economic damage gets multiplied so many times by sheer panic, they can help the economy by improving economic reality, but are helpless against a psychosis that has created their own reality that is not subject to any real world constraints or considerations it would seem.
Wells Fargo made an interesting but not surprising remark Thursday, in the face of this mega sell-off. They warned us that we surely do not want to lock in losses right now, and that says a lot about the mentality of the investors that are still hanging on for dear life as this selling tornado engulfs the stock market.
One of the stupidest things that newer traders do, and this is basically limited to new traders since if you do this, you won’t be trading for long, is the idea that you only lose when you sell. The problem that happens when you do this is that this takes your eye off of the ball of probabilities, and have you staying in bad positions instead of doing the sensible thing and get out of them.
What this serves to do is to make your losses a lot bigger than they should have been, and this translates perfectly to what so many investors have done with their stocks lately, and provides a great example of how bad of an idea this is and how much this can cost you.
If we compare two investors, one that got out at the 5% down mark and one that is still in down 30%, the investor who fled has this 25% extra in their account, and it’s just better to be sitting 25% better off than not. You can always get back in when the dust finally settles and it makes sense to be long stocks again. We do not lock in our losses, we limit them with an approach like this. This is what is called risk management.
The investment industry, including Wells Fargo, want to limit the loss of their funds under management, so they will tell us things this asinine. We’re not sure whether or not this Wells Fargo representative was being honest, as perhaps he actually believes this rubbish, or perhaps this is a way to try to dupe investors, but investors do get duped pretty easily and this is the way a lot of investors think as well.
When a market is going down like this and we get out, we lock in our profits if anything, instead of having them exposed to this much risk. If you aren’t willing to manage your risk exposure with risk at such extreme levels, where we get a bear market sized wallop of pain in just 4 trading days, with more likely to come, you are beyond hope.
Regardless of Wells Fargo and others are telling us, people do hit their threshold of pain and sell, and bears feed off this phenomenon and this effect in itself can have bear markets bigger and longer as the cascade of panicking continues to take its toll.
When you have a story that is being viewed as very dire and more so every day to also fuel the fire, we may not have seen anything yet. Hold on to your hats.
Chief Editor, MarketReview.com
Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.
Contact Ken: ken@marketreview.com
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