The bull market that started on March 9, 2009 has finally come to an end.
It lasted 4,020 days, the longest in history, and an entire decade passed by without a bear market.
The question now is what happens next?
Now that investors have their first taste of a bear market in a very long time, do we quickly correct course and start trending higher?
Or are we in store for more bumps and bruises over the next few months?
According to Goldman Sachs, not all bear markets are equal.
The way we arrived at the bear market affects how long and how bad it will be.
They’ve determined that there are three distinct categories of bear markets, each with a different trigger and characteristics.
An event-driven bear market is defined as being caused by a one-off event like war or an oil price collapse that isn’t followed by a recession.
The other two ways to define a bear market are structural or cyclical.
A structural bear market is triggered by structural imbalances and financial bubbles, like the housing crisis in 2008-09.
A cyclical bear market is one that is caused by rising interest rates, recessions and a drop in corporate profits.
This bear market is considered event-driven at least for now, with the “one-off” being the coronavirus outbreak (you could point to the oil price collapse, but that itself was likely caused by the drop in oil demand due to the coronavirus).
The good news is that of the three categories, event-driven bear markets are the least bad.
Peter Oppenheimer, Goldman’s chief global equity strategist, says “event-driven” bear markets drop 29% on average. That’s compared to a 57% average drop for structural bear markets and 31% average declines during cyclical bear markets.
And in terms of duration, event-driven bear markets are also the shortest, lasting just 9 months on average. Structural bear markets last 42 months on average and cyclical bear markets last 27 months.
However, Oppenheimer also warns that this event-driven bear market could easily tip over into a cyclical bear market.
We’ve never had an event-driven bear market due to a virus or disease outbreak. Typically during an event-driven bear market, cutting interest rates has been an effective tool to jump start the economy. But in today’s instance, rates are already low, and low rates can’t really spur consumers to get out and spend money if they are encouraged or required to stay home.
And, as mentioned above, interest rates are already low, so a monetary response to the bear market – lowering interest rates – has less of an impact.
Perhaps the most worrisome is that the two indicators of a cyclical bear market, falling corporate profits and a recession, have more than likely been triggered, although not formally acknowledged.
Corporate profits are dropping and have been for quite some time. And yesterday economist Alan Blinder said the US is probably in a recession already.
“I wouldn’t be one bit surprised if when we look back at the data, it is decided … that the recession started in March. We won’t know that. It takes months to get the data that would be relevant to a call like that. But it wouldn’t be a bit surprising to me.”
In other words, investors should proceed with extreme caution and prepare for the possibility of a prolonged downturn.
Gas Prices Head Below $1/Gallon As Industry Grapples With Oversupply
The OPEC+ countries are expected to meet today to discuss cutting daily production by 10 million barrels per day as they try to drive the price of oil back up.
At the same time, the US oil industry is slashing prices in an attempt to clear out vast supplies it simply can’t get rid of.
It’s the latest challenge for the US oil industry that is running out of places to store oil while demand falls to multi-decade lows.
Here in the US, wholesale gasoline prices are plunging and are as low as $0.10 per gallon in parts of the Midwest and are only $0.35 per gallon in Los Angeles.
“The sore spots extend from Ohio through to the Great Lakes and all the states that border that, and the Rockies,” said Tom Kloza, head of global energy analysis at Oil Price Information Services.
He added “I’m pretty sure these wholesale prices and spot prices are as low as anything we’ve seen since before the Arab oil embargo” in the early 1970s.
With the US economy shut down and nearly every American at home and not driving or commuting to work, the demand for gas has cratered.
Retail prices are expected to fall below $1 per gallon at the pump in some parts of the Midwest, and could see a national average between $1.25 and $1.50 per gallon very soon.
According to data provided by the Government, we used just 5.1 million barrels a day last week, compared to 9.8 million barrels a day at the same time last year. The last time we used that amount of oil in a week was way back in 1968.
Andrew Lipow, president of Lipow Oil Associates says “We’ve never been in a situation where demand ran into a brick wall and dropped precipitously in such a short time. In other situations, where we had economic shutdowns, we’ve seen a deterioration in demand over time — over months and years.”
Lipow added that he expects to see further production cuts, as the number of places to store oil is quickly dwindling.
“If refineries are only cutting throughput [production] rates 20% to 30%, it’s not enough, and as a rule inventories are filled up to the point where refiners are either going to have to cut additional throughput rates or shut down.”
Kloza, with Oil Price Information Services, says if the cutting the wholesale price isn’t enough to move the gasoline, then shutting down the refineries all together is the next step.
“When you see these discounts and you see these numbers, that tells you they can’t clear gasoline. In the country’s midsection, there is too much gasoline. There is more than 50 days supply there, and they are going to cut refinery runs.”
Kloza added, “It tells you the refineries are in trouble. I personally think there’s a half dozen refineries now that are being reviewed by the companies that run them and they are candidates for closure.”
Typically we would be heading into the busy summer driving season. But with the country shut down, there’s not an opportunity to quickly work through the oversupply.
It’s likely low gas prices are here for at least a few months, no matter what production cuts OPEC+ may agree on today.
Stocks Close In the Red After Massive 900-Point Rally Falls Apart
In what could be an ominous sign of things to come, the stock market couldn’t hold on to a massive rally yesterday. Stocks closed the day in the red.
The Dow Jones Industrial Average climbed as much as 937 points intraday. This was before it gave back all the gains and closed the day down 26 points.
It could turn out to be a turning point that many experienced investors have been predicting.
Their belief is that the rapid 20% rebound in stock prices couldn’t last. They also believe that we may eventually re-test the March 23 lows.
900-Point Rally Fails
Jim Cramer, host of ‘Mad Money’ on CNBC seems to be slowly coming around to the idea.
“Just think about the last 500 Dow points [Monday]. I don’t know. They were done in, what, about 30 minutes. That’s not sustainable. There are people who are just anxious about taking something off the table because they’ve just seen a remarkable two-day bull market, and now they’re ready to find out about … the various stages that we need to get out.”
David Kostin, the chief U.S. equity strategist at Goldman Sachs, believes that stocks are poised to fall again. He mentioned that it’s likely, if you compare it to how the market behaved during the 2008 financial crisis.
“The way I think about this is [there’s an asymmetry] in terms of downside risk towards a level in the S&P 500 of around 2,000, which is about 25%, and an upside of around 10% to a target at the end of the year of around 3,000. [That’s not symmetrical] in terms of timing. I think the risk is a lot further towards the downside,” Kostin said. He then added: “I would just remind you that in [Q4 2008], there were many different rallies, they’re called bear market rallies, some of which were almost 20% a couple of times, but the market did not bottom until March of 2009.”
“I wouldn’t be surprised if we hit 2,000 on the S&P 500 ”said Alex Chalekian, the CEO of Lake Avenue Financial.
He added “We’re going to see opportunities and we’re going to take advantage of them,” he said. “But in the meantime, there’s no rush to jump back into the market right now.”
Economic Strategists React
Peter van der Welle, a multi-asset strategist at Robeco says “From a sentiment angle, recent exceptional bounces suggest that investor sentiment is still in the denial phase, rather than in the phase of capitulation that paves the way for a new bull market.”.
In addition, Albert Edwards, a global strategist at Société Générale, said that investors hoping that monetary and fiscal stimulus can save the market through this rally have made a mistake. “This optimism is the legacy of a long bull market. Investors can’t conceive that the Fed will ‘allow’ the stock market to collapse. Think again. That was the view in 2007 too,” he said.
Finally, Goldman Sachs conducted a poll with more than 1,800 of its institutional clients as respondents. It found out that 50% believe the lows have not yet been set. The survey also revealed that 75% believe equities remain in a bear market.
With Survival at Stake, Small Business Owners Frustrated by Aid Delays
Greg Hunnicutt has almost entirely shut down his Houston-based construction business. At his one remaining job site, he’s being careful to minimize the risk of anyone being exposed to the coronavirus. So he keeps fewer workers on the job.
“My electrician is there now doing some work,” he said. “It’s just him and his helper. So what I’m trying to accomplish here is reducing how people interact.”
With his income sharply reduced, Hunnicutt needs more funds, and fast. He reached out to NPR on Friday, when the Small Business Administration’s coronavirus crisis lending program opened. At the time, he was having trouble getting through online to apply for an SBA loan through his bank, Wells Fargo. I asked him this week how it was going.
“Well, it’s not,” he said, laughing. He says he filled out a form on the bank’s website over the weekend, but he hasn’t heard back yet.
But he says he needs that money soon to keep his business alive.
“I paid my guys two weeks,” he said. “Well, that was two weeks ago. Starting today, this week, they haven’t been paid.”
If the process doesn’t move quickly, he said his business will be in serious trouble.
Business problems with banks
Hunnicutt is one of dozens of small business owners that contacted NPR, describing obstacles in applying for loans. The $350 billion SBA initiative, called the Paycheck Protection Program, is designed to keep workers at small companies on the payroll during the crisis.
The Trump administration had said it hoped the program could give some businesses immediate financial assistance. And administration officials have bragged that hundreds of millions of dollars were disbursed through banks on the first day.
Some small business owners, like Hunnicutt, are waiting to hear from their banks. Others have said they haven’t been able to get through to their banks, due to crashing websites.
Several business owners cited restrictions from Bank of America as a major hurdle. On Friday, Bank of America said a deposit account with the bank was not enough to qualify for loans. Applicants would need loan or credit card accounts with the bank. That left out the many businesses without lending relationships with the bank and sparked an online backlash. Bank of America loosened its requirements over the weekend.
The SBA program reflects the difficulties of quickly setting up a massive new emergency lending effort, and running it through myriad banking institutions.
And it comes at a time when businesses desperately need money. A recent survey from the U.S. Chamber of Commerce found that one in four businesses say they are two months or less from closing permanently, and one in 10 say it’s one month or less.
Bigger problems than banks
Small businesses’ difficulties with the new program go beyond their banks, however. New rules written after Congress created the program are tripping up some businesses, according to Stephanie O’Rourk, a partner at accounting firm CohnReznick.
“The problem with the program is that it doesn’t align with the reality of the situation that a lot of businesses are going through right now,” she said.
For example, she says, the new rules now say that the loans must be paid back in two years instead of the 10 that the CARES Act says. In addition, Treasury added a rule saying three-quarters of the money must be used on payrolls in order for it to be forgiven.
For some businesses, non-payroll expenses are just too high to spend that much on employees.
Chelsea Altman, co-owner of five restaurants in New York City, says that rule will be bad for her and other businesses in high-cost cities.
“In New York state or New York City, your rent is very high,” she said. “So there is a chance that even with this 75 percent going to labor and then the other 25 percent is supposed to go to your rent, there’s times when that won’t” cover the rent.
Some banks displeased
Many banks opened the program up only to their own customers. As NPR has reported, that worried some small business advocates because it threatens to leave out smaller, and particularly, minority-owned businesses.
Banks, meanwhile, had their reasons for wanting to limit their applications, according to Aaron Klein, policy director of the Center on Regulation and Markets at the Brookings Institution.
“The Treasury Department made a major unforced error, leaving anti-money laundering rules on autopilot,” he said.
To lend money, banks have to go through a procedure called Know Your Customer to prevent money laundering. It can be a cumbersome process, Klein explained, and stands to be a serious impediment to an effort that seeks to get tens of billions out the door in a matter of days.
Other banks have voiced their own issues, including forms that changed overnight, unclear guidance from the government, and difficulty with the Small Business Administration website.
For now, at least one concern with the program is being answered: that the initial $349 billion appropriated for it is too small to meet business demand. On Tuesday, the Treasury said it was preparing to ask Congress to spend another $200 billion on the program. Senate Majority Leader Mitch McConnell said on Tuesday that he plans to work with Democrats and Treasury to put more money into the program.
Copyright 2020 NPR. To see more, visit https://www.npr.org.
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