At the end of January, the hypothesis that we were in the presence of a Black Swan, a catastrophic and unpredictable event, seemed a little incredible, now it has become a certainty. The stock market dynamics of the last week, statistically the second worst since that of March 2009, leave little doubt that the world’s stock markets have all entered a bearish phase.
Technically, the same is defined as a fall of more than 20% compared to the previous high, therefore the current corrections ranging from 20% to 39% are fully covered by the definition. Stock market history of the post-war period offers several comparable episodes, but those that in terms of quantity present greater analogies, are the 2008/2009 collapse relating to GFC1, the first major financial crisis of the period, and Black Monday of October 1987. One should recall that in the first case in the USA it took 3 and a half years to recover the pre-crisis levels while in the second case it took just one year. The similarities concern both the extent of the corrections suffered by the indices and the short period in which they occurred. On the other hand, from a qualitative point of view, these episodes are very dissimilar to the current economic and monetary situation, with fundamental aspects of the current GFC2 much more solid than in 2009 accompanied by monetary policy support in place, in alternating phases, for more than a decade. At the current levels of global indices, such as the MSCI, a 5% contraction of world GDP, $ 95 trillion, is discounted, on an annual basis, exactly as in March 2009. This estimate could prove optimistic, if we consider that the annualized Chinese GDP growth in the first quarter may drop below zero and that it may not recover by the end of the second quarter. Recently, only the U.S. FED and the British BOE have accelerated QE4 by reducing their base rates, even if the problem is not the cost of money, but the availability of liquidity to refinance credit, denoted by the subsequent decision of the FED to enter $1.5 trillion into the system in the form of repurchase agreements and to increase QE4 by 700 billion.
Soon, it seems certain that the Chinese PBOC will take the same monetary measures while in Europe there is a worrying lack of coordination between the governments of the member states and the European Community authorities, not to mention the absence of the ECB, which could be by design, at least judged from the apparently inappropriate statements of its Governor, Ms. Lagarde. In fact, while Germany launches a €550 billion support plan for its own health sector and economy, Italy, the eighth industrialized economy in the world, which would need a similar amount, has been able to allocate only 25 billion and has seen its stock market plummet 17% in a single session, a loss of 0.65% of GDP, in the wake of the Governor’s claim that the ECB is not obliged to contain the spread on government bonds of EU member countries.
At this point, the fear of equity investors that Italy, at the end of the health crisis, may find itself in the same economic situation of Greece in 2009, appears justified unless the words of the President of the EU are followed by immediate concrete action in the form of adequate funding for member states, such as the hypothesized €3,000 billion European plan. Meanwhile, in the past few hours, the Governor of the Fed, Powell, has also thought well of adding fuel to the fire of the crisis, announcing the sudden decision to reduce the base rate by a further percentage point in an extraordinary meeting outside the preset calendar, as if to confirm the absolute gravity of the situation. From a technical point of view, six sessions went from the initial panic of Friday, 6th of March, to the capitulation of the stock market on Thursday, the 12th of March. So taking a cue from what happened in October ’87 and March ’09, we could already find ourselves in the vicinity of the lower part of the wide bands of oscillation of the indices determined by the marked volatility of the same, caused by the enormous uncertainty regarding the containment of the COVID-19 and its inevitable consequences on the world economy. Quantifying, although the S&P500 index had returned briefly above its support level of 2700 points, the recent session low of 2478 points and the December 2018 low of 2360 still remain possible in the short term, especially in light of this week’s reopening of trading where there was a marked drop due also to the coverage of margin calls by institutional operators, banks and investment funds. The situation of the EuroStoxx 50 Index is far more compromised both because the fundamentals of the economy of the Old Continent are weaker and because the most convincing support levels are found in the 2000/2100 area, from 2011/12 and at 1820, the minimum for 2009, therefore relatively far from the recent level of 2350. As noted above, the weekly opening of trading does not bode well for the short-term dynamics of the indices, exacerbated by abnormal volatility, as the US VIX index rose well beyond its 2009 peak, suggesting accumulation on drawdowns; favoring single stocks of quality with reasonable dividends, and fulfilling the desired allocation through gradual purchases.
P.S.: editorial close at 12.00 AM – 16 March 2020
Nicola Bravetti Data Source: Bloomberg
“This report cannot – nor can – be considered a solicitation to invest in financial instruments”