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An Epidemic of Fear - When does it end? How does it end?
Article by Sam Sweitzer
To think in narratives is human. We like understanding the world through stories. In times such as these, my job as a portfolio manager is to help clients make sense of the disparate and widely diverging pieces of information. We need to know the plot of this story, when it ends, and how it ends.
The current COVID-19 sell-off and situation are like nothing we’ve ever seen. The largest countries are only starting to respond with severe mobility restrictions, which will last for at least several weeks, and potentially several months. The dual shocks of coronavirus and an oil price war will almost certainly push the global economy into recession. A significant drop in economic activity seems almost certain as people stay home, and the bustle of life slows considerably.
Yesterday (Tuesday), we saw the 3rd most substantial decline in US markets on record. This decline followed last week’s drop, where all the major US stock markets reach 20%+ declines from their recent peaks. In previous bear markets, this process took more than four months. This time, it took just three weeks. If previous bear markets tell us anything, it is that bone-jarring volatility—both up and down—is likely to continue.
This is the fastest descent from an all-time high on record. The two big exogenous shocks, from the oil price war and coronavirus, make this different from any other stock market crash, but there are still plenty of similarities. The chart below compares the fall from the February 19th peak to the decline from the pre-Black Monday high in 1987, and the drop from the weekend of the Lehman bankruptcy in 2008. The last example starts when the market was already down a lot, but Lehman was perceived at the time to change everything, and the market behaved similarly to 1987:
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