Guest News Brief by Kip Hansen — 18 May 2020
There has been a lot of talk in the press and from talking heads that the Covid lockdown has crashed stock markets and caused loses of trillions of dollars.
It is true that stock markets took an initial heavy hit – but all things in the stock markets are relative. Of course, there has been an “economic downturn” – the economy has been literally turned down by edict from national and state governments – millions have been put out of work as their employers have been ordered to stop doing business by the multitude of nations that have sacrificed their economies in the [misguided] belief that doing so “saves lives”.
But the idea that the Worldwide Covid Lockdown has crashed U.S. stock markets is simply not true.
Here is the data, from Yahoo Finance, as of 1145 hrs ET, 18 May 2020:
[Narrow yellow horizontal lines have been drawn at today’s level to illustrate when this level was last seen in the market. You can see the full sized originals from this page — clicking on the three indexes at the top bring up individual pages with graphs. You can select “Max” for the time period, and “Full Screen” to see the updated interactive versions of the images used below – kh ]
It is obvious that there was a shock response to ordered lockdowns visible in each of the three indexes – but these sharp drops only took markets back down to the levels seem in late 2017 or early 2018 – two years of unconstrained gains were temporarily lost.
The NASDAQ has almost entirely recovered. The S&P is back up to levels seen last year while the Dow Jones (remember, this is the Dow Jones Industrial Average) is still down at the levels seen in 2018 and 2019.
There is no stockmarket crash in response to the pandemic – the three major U.S. markets are all higher today than they were in January 2019. Only the Dow Jones Industrial Average is even seriously lagging.
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Author’s Comment:
And that’s the news for the day….
Don’t ask me to explain it, I don’t know. I am no financial wizard. But it sure is interesting – even I thought the markets would be severely affected by shutting down of much of our economic engine.
Personal note: Many of us older citizens have our life savings invested in various ways – some have pension funds, some have personal nest eggs – that depend on the health of the stock and bond markets. Depending on the savvy of our financial advisors – be it ourselves or finance professionals – we have weathered the storm rather handily, despite ill-advised actions by our governments in response to the Covid pandemic.
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It’s more than just likely that soon enough the current financial politbureau punishes all players at the rigged casino that falls afoul of the “correct” dogma. We are enmeshed in a Neo-Soviet economic system that leads only one way: towards greater tyranny and tremendous suffering.
Weak.
The much stronger (and valid) argument is that most of the 40% drop in US stocks was caused by the oil price war between the 3 top producers – USA, Saudi Arabia, and Russia. Russia just took the opportunity to start throwing Molotov cocktails as demand was already drying up because of the Wuhan plague.
The markets didn’t come back because there was some great news about plague treatments, or vaccines, or local governments lifting lock-downs. The markets recovery caame as soon as Trump negotiated a partial truce with the Saudis and Russians.
Duncan, Stocks were already falling before the Saudi/Russia dust up and would have continued to fall, with or without the oil price war (probably not as far nor as fast, but it was still already heading in that direction). The stock market hit bottom on March 23rd. Trump mentioned having talked with the leaders of both Russia and Saudi Arabia on April 2nd (a week and a half after the markets had already started their climb up from the bottom) and it wouldn’t be until the following week that they actually agreed to a deal. So nice try, but your theory doesn’t fit the timeline.
FWIW, as a generally well-respected market timer, I think new highs are baked in. Yields in money markets are net negative, yet they are packed with money. Shorting the market via the SH is at record levels, despite a handsome rally. Implied volatility is quite high (which equates to options premiums being fat) means that smart money will be buying every dip, even if they are hedging risk, if only to capture those fat options premiums. The stock market’s the only liquid game in town that isn’t a guaranteed losing proposition.
If you want to see some eye-opening charts, sign up for a trial and I’ll send them to you.
Ah yes Charting! Burton Malkiel used to have students create charts by flipping coins. He once punked one of his chartist friends by getting him spun up only to tell him it was created by one of his students as an exercise.
I’m a mediocre chartist. My wife, however, ran a service for a long time that had spectacular performance, based mostly on her eye and Edwards and McGee chart work.
Me, I’m a sentiment and indicator guy. I’m well known for it.
https://timerdigest.com/pubs/issue.pdf
I always go to a climate site for my financial analysis. /Sarc
The market did indeed crashed. Investors acted like we were on the verge of a nuclear exchange. Once the panic subsided money flowed back into the market. All they did was transfer their wealth to those who get greedy when people get scared and scared when people get greedy. (The Buffett Rule.)
John ==> You may call it a “crash” if you wish . . . but for most people holding long-term investments — or even investors who look at their five-year gains and loses, even if heavily invested in Dow Jones equities, — they are 36% up. From the 5-year viewpoint, investors in the NASDAQ equities have still doubled (216%) their money. S&P investors are up 46% over five years — about 10% per year, a very good rate of return — even after what you want to call a “crash”.
People who held onto their sticks through the 1930s did very well. I guess there wasn’t a crash in 1929.
John ==> The Dow Jones did not return to its prior-to-1929 crash high until sometime in 1954 — 24 years later.
People who held onto their sticks through the 1930s
their sticks were probably worth more than their stocks 😉
More seriously, John, by 1932 stocks were only worth 20% of what they were just before the market crashed in 1929, even by 1939 stocks had not regained the ground lost from that high as it was still over 50% below. so no, they didn’t do very well through the 1930s (hence why that time period is known as the Great Depression). Now if they were prescient enough to sell just before the crash and bought in at the 1932 bottom, they weren’t doing too bad, but not many people have that kind of psychic stock-timing ability.
Bottom line, it took a long time to recover from the 1929 crash. And indeed most other crashes, the recovery tends to be measured in years. So far it’s only been a little over 3 months since the market started heading down and it’s been only 2 months since it started climbing back up and the market has regained more ground than it did throughout the entirety of the 1930s, so, sorry, but your comparison to the great depression era crash doesn’t pass the laugh test.
John, I’d personally describe it as more a severe correction than a crash. Yes the market did drop considerably, it’s also regained a good portion of that ground since (and it’s only been two months since it hit bottom). So even if you want to call it a crash (and many do), it’s unlike any crash we’ve ever had. On the plus side, It helped me make some really nice stock purchases that I’m quite happy with thanks to the Buffet Rule, though I’d have preferred China had done the right thing and prevented it from ever leaving Wuhan instead of allowing international travel out of there for a month after they stopped travel within China from there.