Beijing, March 23 (Xinhua) the unnamed crisis reminds investors of the catastrophes of earlier years, combs historical clues and provides guidance on the situation that the market and economy may face.
Although in the early days of the COVID-19 outbreak, many observers and investors warned of global health and economic threats, the US economy quickly shut down and the US stock market plummeted 30% in a month, which was not what many people could have foreseen. For other reasons, they have not been vigilant about the market.
In fact, the severity of the stock market sell-off is so extreme and rare that no one dares to predict it in detail.
Risk spreads on investment-grade corporate bonds have soared from record lows to roughly the same level as defaults during the recession. The daily volatility of the s & p 500 index reached or exceeded 4%, the highest since the second world war.
John Roque, technology strategist at Wolfe Research, points out that on March 12th the S & P 500 was at least 22% below its 50-day average on the 85th day since 1929. March 12 was the day so far when indicators showed the greatest downward pressure on the economy. Of those days, 65 were during the Great Depression of 1929-1940. The rest are the financial crises of 1987, 2002 and 2008.
This extreme decline usually occurs during the most inselective and strongest liquidation phase of a bear market-when the largest proportion of stocks are sold blindly and when volatility is at its peak. But so far, this is by no means the time when the index itself reaches its lowest point, usually a few months later, sometimes even a few percentage points later.
Contrast history
Analysts have been combing through previous periods that were relatively undiscussed, when a global influenza pandemic coincided with a severe market decline. During the 1918 Spanish flu pandemic, the stock market plummeted 33%, and it took two years to recover. But there was also the most destructive global war to date, so the comparability with today is questionable.
Torsten Slok, economist at Deutsche Bank, said: "Today, we are likely to see a stronger rebound because we will adopt a more aggressive fiscal and monetary policy response. We may also see a milder rebound as consumers and companies ease liquidity pressures, either because of the long-term negative impact of the corporate bond market, or because of the unusual liquidity-driven negative correlation between equities and long-term interest rates. "
These characteristics remind Barry Knapp, managing partner of Ironsides Macroeconomics, a well-known investment firm, of the unpleasant but brief recession of 1980. Just like in March 1980, the government plunged the economy into recession and tried to solve a problem. The problem in 1980 was severe inflation, and the Carter administration's credit restrictions plunged the economy into a brief and severe recession, but with little success. By 2020, the contraction is likely to be greater than the 8 per cent decline in GDP [in the second quarter of 1980]. "
For many, the impact of the 2008 crisis was the most profound, both because the economic trauma is still vivid and because we see some of the same obstacles and disruptions damaging the circulatory system of capital markets.
Trillions of dollars' investment strategies presuppose weaker volatility, sufficient demand for corporate credit, an inverse relationship between stock and bond prices and the release of sufficient liquidity.
All non-cash assets have been converted into cash, and even ordinary money market funds have been converted into safer Treasury bond money funds. The Fed is now the buyer of last resort for Treasuries, commercial paper and municipal bonds. Fixed-income exchange-traded funds (etf) have deviated from their underlying net asset value as investors flock out faster than funds sell assets.
Locate the trading low
All of this helps to exacerbate volatility and trigger panic signals, which is at least one factor in positioning some kind of trading low-even in disorderly and fragile markets.
As for stocks, they are still relatively easy to sell. In this economy, the huge losses of financial, business and human capital are increasing day by day. The price of publicly traded stocks and corporate bonds is the most direct way to record such losses.
Analysts who track the activities of various systemic funds now say that participants in the "risk parity" of leveraged stocks and bonds have largely completed their clean-up, pulling their equity exposure to the lows of the financial crisis. this is a small net benefit for the stock market that is expected to get some relief.
It makes sense that trend-following hedge funds are heavily shorting the market and remain a source of downward pressure unless or until a major rebound or policy move breaks the negative feedback cycle they are in.
We are now in a position where the market needs to rebound as soon as possible to break the mechanical selling spiral, in which case even a rapid and violent rebound of 10-15% looks like a mechanical rebound on the chart.
If the s & p does not stay near 2300, the next technical target of 2150 does not look so scary, because it is "only" down 6.7 per cent, less than half of its loss last week.