A Month of Market Mayhem: How Covid-19 Erased Trump-Era Stock Market Gains in 4 Short Weeks
3.22
“As I sit down to write this newsletter, it strikes me how difficult it would be to find a story that isn’t about, affected by, or even tangentially related to the global spread of the novel coronavirus, Covid-19.”
I wrote that sentence four weeks ago. At the time, the coronavirus was just beginning to seep into our collective consciousness.
What a difference one month makes. Four weeks ago, my wife and I were gearing up for a Spring vacation in Japan to see the cherry blossoms.
Our trip has been cancelled (obviously). Now we’re hunkering down in our small Brooklyn apartment, adjusting to the “social distancing” era. It’s been a difficult time, but we recognize that we’re among the lucky ones.
On that somber note, let’s get to this edition of Three Stories, which provides a deep dive on financial markets over the last several weeks, and addresses one simple question: How did we go from from record stock market highs to the prospect of another Great Depression in just a month’s time?
A Month of Market Mayhem: How Covid-19 Erased Trump-Era Stock Market Gains in 4 Short Weeks
When Covid-19 first creeped into the national conversation in late January and early February, investors were eager to ignore potential signs of peril. Stocks were still flying high on the euphoria of an 11-year-long bull run. The Dow Jones Industrial Average hit an all-time high on February 12th. The S&P 500 and Nasdaq indexes hit record highs on February 19th.
Let that sink in for a moment. On February 19th, there were already 75,000+ confirmed cases of Covid-19 in China. A full month had passed since the U.S. confirmed its first coronavirus case in Seattle, and there were 15 confirmed cases as early as February 13th.
So how is it possible that investors were not reacting?
There is no simple answer to that question, but two general explanations spring to mind.
The first explanation is psychological. Investors and the financial industry have a vested interest in maintaining stock market growth. As a reporter wrote at the time, “Many investors are wary of calling it quits on a decade-long bull run in stocks.” In other words, it was in the best interests of investors to continue buying stocks. Investors had little financial incentive to entertain the seemingly fringe possibility of the worst-case scenario: a global pandemic.
The second explanation is rooted in market analysis. For the first month of its existence, the novel coronavirus was largely contained within China. As a result, there was scant reason to consider the possibility of Covid-19 becoming a global phenomenon. This isn’t to say that investors were unaware of the virus, or its deadly spread across China, or even the fact that coronavirus had landed on U.S shores – but rather, investors assumed the problem would be isolated to China (or at least to Asia), since that’s what the headlines were indicating.
When U.S. companies with manufacturing facilities in China – such as Apple, on February 18th – issued warnings about sharply reduced Q1 revenues due to supply chain repercussions, stocks of select companies took a small hit and investors began to recognize that coronavirus would impact U.S. markets, but the possibility of a global pandemic was not yet conceivable to most of Wall Street.
Just consider what investment professionals were saying to media on February 19th, the day the S&P and Nasdaq hit record highs:
“Encouraging signs have continued to emerge over the past week that China’s coronavirus outbreak is contained,” said one emerging markets strategist.
“It sounds as though investors are breathing a sigh of relief that they believe the worst of the coronavirus is behind us,” said one portfolio manager. “Investors are feeling emboldened because central banks have got their back,” he added, referencing a stimulus measure from China’s central bank.
“Net, net, the [U.S.] economy looks good with residential home building activity beating expectations and a little more producer price inflation even if the data overstate how well the country is doing in terms of generating the growth and inflation the Federal Reserve wants to see,” said a large bank’s chief economist (for whom Covid-19 was evidently not even factoring into his economic prognosis).
And yet the virus was continuing its inexorable march beyond China’s borders, and the once-unthinkable prospect of a global pandemic was very quickly crystallizing into a plausible (if not likely) outcome. The week starting February 17th, a number of warning signs started flashing red:
South Korea reported a doubling in its number of confirmed coronavirus cases.
Iran reported four coronavirus-related deaths, and Italy reported its first death.
The U.S. reported 35 confirmed cases of coronavirus, prompting White House officials to prepare to ask Congress for emergency funding.
The World Health Organization warned that “the window of opportunity [to contain the virus’ global spread] is narrowing”, and WHO officials expressed worry about “the number of coronavirus cases with no clear epidemiological link [to China].”
Market activity that week (February 17th - 21st) reflected this troublesome sequence of events and bad news. Investors began flocking to bonds and gold (a “safe haven” asset during times of crisis), while all three U.S. stock indexes suffered declines of at least 1.2%. A widely circulated report by Goldman Sachs on February 20th warned of a 10% stock market correction.
And so, as if making up for lost time, investors fulfilled Goldman’s prophecy the week starting February 24th, and they did so in a big way. During those five days of trading:
All three major U.S. stock exchanges recorded double-digit losses: the Dow fell 12.4%, the S&P 500 tumbled 11.5% and the Nasdaq shed 10.5%.
Commodities fared equally poorly, with Bloomberg’s commodity index falling 6.9%; oil had its worst week (at the time) since 2008.
Investors continued funneling their money into government debt: the 10-year Treasury note reached a low of 1.127%, and the two-year yield dropped to 0.878%, its largest one-week decline since September 2001.
The pivot in market sentiment was sudden – echoing the suddenness with which the virus became a global health crisis. And yet, there was still uncertainty about just how bad Covid-19 would be for markets and the U.S. economy.
President Trump continued to downplay the situation. On February 27th, he tweeted the number of U.S. cases was going down. On March 2nd, he declared, “The United States is right now ranked by far No. 1 in the world for preparedness.” And so on, and so on.
As if unsure of where things were headed, markets the following week (beginning March 2nd) whipsawed back and forth, with the VIX index (which measures volatility) hitting levels not seen in over a decade. Investors continued to plow their money into long-dated U.S. Treasuries, with 10-year yields once again falling to new record lows.
But the S&P 500, Nasdaq, and Dow Jones indexes all closed that week with modest gains, propelled in no small part by the Fed’s emergency half percentage point interest rate cut on March 3rd, the largest one-time reduction since the financial crisis.
There were still hopes on Wall Street that the coronavirus would be contained. On March 2nd, Goldman’s chief economist predicted the economy would likely shrink for “a quarter or so” but rebound without ever becoming a recession.
By Friday, March 6th, with the virus showing no signs of abating, former and current government officials started talking about using other tools (in addition to interest rate cuts) to stimulate economic growth. Sheila Bair, the former FDIC chair, predicted another round of quantitative easing was on the horizon. Eric Rosengren, Federal Reserve Bank of Boston President said the Fed may consider buying a “broader range” of securities or assets (beyond just treasuries) as part of any QE push.
On Sunday, March 8th, investors were gearing up for another week of volatility when, Saudi Arabia shocked global investors by announcing it would be ramp up oil production, after a scuttled deal with Russia that would have limited supply and prop up prices.
The ensuring week (beginning March 9th) of market volatility, government action and the public’s dawning awareness of Covid-19 was historic in its own right, warranting a day-by-day breakdown:
Monday, March 9th: On the back of the Saudi-Russia news, oil crashed 30%, its greatest one-day collapse since the U.S. invaded Kuwait in 1991. Following suit, the S&P 500’s sell orders were so great Monday morning, they triggered a temporary halt on trading in the early morning hours, booking a 7.6% loss on the day. The Dow similarly plunged, recording a 7.79% loss on the day.
Tuesday, March 10th: Equities roared back to life after Monday’s historic losses, with all three major indexes jumping nearly 5% on the day. Investors were buoyed by the prospect of government stimulus and greater action from the Trump administration to prevent the virus’ spread.
Wednesday, March 11th: Markets plunged once again, erasing Tuesday’s gains and marking the end of the Dow’s 11-year long bull run, in response to the World Health Organization’s declaration that Covid-19 is officially a pandemic. Wednesday evening, after U.S. markets closed, President Trump delivered a primetime speech from the Oval Office. The address was designed to quell concerns, but it contained numerous factual errors and mischaracterizations, sparking a late-night panic among traders in Asia and laying the groundwork for another dismal day.
Thursday, March 12th: Sure enough, U.S. markets had their worst day since the 1987 crash, with the Dow tumbling a full 10%, the S&P sliding 9.5% and Nasdaq closing 9.4% lower. The Fed announced it would be injecting over $1 trillion into the economy through repo operations, but the news failed to soothe investors as America started shutting down, with widespread school closures and announcements of indefinite delays from professional sporting leagues, museums, amusement parks and other sites.
Friday, March 13th: Similar to Tuesday’s recovery, markets on Friday surged once again, partly on the back of Trump’s press conference in which the president declared a state of national emergency and rolled out a series of plans to increase testing and stop the virus’ spread. All three major stock indexes closed above 9% on the day – much to Trump’s delight – but still closed the week down considerably.
Which brings us to last week (beginning March 16th), which saw Covid-19 spread to all 50 states, and with New York and California - two epicenters of the virus - taking increasingly draconian measures to slow Covid-19’s spread, such as the closure of all restaurants and bars, ordering all “non-essential” workers to stay home, implementing severe lockdowns on movement, and banning gatherings of over 50 people.
In unison with the social and economic dislocation, markets tanked once again, clocking their worst week since the 2008 crisis. The S&P 500 tumbled 15 percent from where it began Monday. The Dow slid by nearly 17% to back under 20,000, erasing all of the gains that had been made under the Trump presidency.
In response to the prospect of an economic depression, the Trump administration and the Federal Reserve have been pulling out all the stops to staunch the economic bleeding, from multi-trillion dollar stimulus packages to trillions in overnight Repo funding to banks to the largest interest rate cut in Fed history.
What does it all mean?
Stock market prices are a reflection of investors’ collective hopes, fears, and expectations for individual businesses and the economy at large. The eleven years of synchronized global growth had its ups and downs, but it unfolded amid relative stability in the underlying social and economic infrastructure of the United States and other large countries, and it was propelled by continuity in global supply chains.
Covid-19 has shattered that stability and continuity. Workers across all sectors are losing their jobs. The U.S. economy is in tatters. One Fed official now predicts that 30% of the U.S. workforce may be out of work in Q2; he’s also forecasting a shocking 50% decline in GDP.
The spread of coronavirus has not only undermined investor confidence, but hindered investors’ ability to reasonably assess what will happen in the next few days, much less the next few weeks or months.
As the United States prepares to enter a lockdown – with one in five Americans now following orders to stay at home – there is really no telling when or where the market slump might end.
John Hyatt, the author of Three Stories, is a writer and public relations professional. You may connect with him on LinkedIn or follow him on Twitter.