Breaking Down What is Among the Most Extreme Sell-Off Wall Street Has Seen

A recent CNBC article provides insights and analysis of the coronavirus-related market sell-off.

Here are some highlights:

  • While many sounded alarms when COVID-19 emerged in China, the article says “the swiftness of the economic shutdown and violence of the U.S. market’s 30% drop in a month were not foreseen by many who had not already been wary of the market for other reasons.”
  • Analysts have been comparing historical periods of global pandemic and coinciding market drops: The Spanish Flu pandemic of 1918, for example, triggered a 33% drop in the stock market—which took two years to recover. However, that period also coincided with “the most destructive global war to date,” which makes for a poor comparison to today’s environment. The Hong Kong flu outbreak in 1969 led to a 36% decline in the S&P 500, but stocks recovered relatively quickly, the article notes, adding, “there was no forced shutdown of the economy as there is now, with an instant  evaporation of hundreds of billions in commercial activity throwing healthy companies into peril and casting  millions into unemployment.”
  • The article compares the current situation to that of the 2008 financial crisis, which it notes is still relatively fresh in investors’ minds and saw some of the “same clogs and ruptures” to the capital markets system.
  • According to Deutsche Bank economist Torsten Slok, “Today, we may see a stronger rebound because of a more aggressive fiscal and monetary policy response. We could also see a more muted rebound as consumers and corporates rebuild cash levels, or because of a longer-lasting negative impact on corporate bond markets, or because of the unusual liquidity-driven negative correlation between equities and long rates.”
  • While there are some signs that maybe the “headlong liquidation phase” of this period is lulling, the article notes that there are no guarantees: “Deciphering such clues is like forecasting the weather before radar or telegraphs: Noticing how the wind ruffles the leaves, watching how the animals  are acting.”
  • The article concludes, “We’re at a point where the market needs to rally soon to interrupt the mechanistic selling spiral, where a fast and vicious rally of even 10-15% would look like a mere rote bounce on a chart.”