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It's A Bear Market, And Central Banks Won't Save Us

Mar. 06, 2020 2:54 PM ETSPY63 Comments
Ross Hendricks profile picture
Ross Hendricks


  • Going into February, U.S. stocks (SPY) traded at record valuations against a backdrop of slowing economic and earnings growth.
  • Now, the escalating Coronavirus threatens to add further downside pressure to an already-vulnerable U.S. stock market.
  • The recent price action and fundamentals suggest stocks are likely entering a bear market.
  • History shows that central bank easing will not stop the coming bear market, and thus U.S. stocks still have significant downside from here.

Risk happens fast...

Last week, U.S. equity markets suffered their worst weekly decline since the dark days of the 2008 Financial Crisis, with the S&P 500 (SPY) dropping more than 11% in just five trading days. Perhaps more importantly, we set a new record in terms of the speed and severity of a drop from record highs reached two short weeks ago on February 13th. The violence of this move is best captured in the Volatility Index (VXX), which exploded from a complacent 14 in mid-February to as high as 50 on Friday:

Source: Trading View, Author

While this violent correction caught many investors off-guard, the truth is that the warning signs were flashing bright red for weeks leading up to this event. In the Atlas Research Blog - where I track a live portfolio with real time trades - I've been writing about deteriorating technical and fundamental indicators for several weeks, including this warning issued on February 17th:

The bottom line: today's market dynamics are not the stuff of sustainable, healthy bull markets. Instead, all evidence points towards a terminal stage, blow-off top emerging in U.S. equity markets ... And given the speculative excess in today's market, things could turn ugly fast."

Followed by this warning issued on February 23rd:

Thus, the current economic and financial backdrop represents a bubble in search of a pin. And all signs indicate that the escalating Coronavirus outbreak could deliver the proverbial pin prick.

In today's article, I'll detail why U.S. stocks were vulnerable to slowing economic and earnings growth even before the Coronavirus outbreak. I'll also detail why the Coronavirus outbreak could already been a much bigger problem here in the U.S. than the "official" statistics suggest. Finally, I'll show why the recent price action indicates we're entering into a bear market, and why central banks won't save us from the

This article was written by

Ross Hendricks profile picture
Ross Hendricks also writes at the Ross Report. He is a professional research analyst, whose experience includes working directly with the CEO and CIO of a $500M global macro Fund, as well as a senior analyst publishing research to over 40,000 clients monthly.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in SPY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I currently have no position in the SPY, but may enter a short-term trade via call or put options at any time.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (63)

@Atlas Research

$RRC -- A thing of beauty. Repricing higher today, and likely continuing this trajectory into the earnings announcement. Earnings release pushed out to October 29th. Giving institutional investors more time to pile in?
Ross Hendricks profile picture
I doubt that would be the reason... there has been a lot of M&A activity/chatter in shale. It's possible there's a deal has emerged, but who knows - pure speculation.
Milkweed profile picture
@Atlas Research

www.eia.gov/... Week ending October 21, 2020

The net injections into storage totaled 49 Bcf for the week ending October 16, compared with the five-year (2015–19) average net injections of 75 Bcf and last year's net injections of 92 Bcf during the same week.

Net HDD and CDD changes from normal -160; 732 Total normal for 21.86% less than normal

www.eia.gov/... Week ending October 14, 2020

"The net injections into storage totaled 46 Bcf for the week ending October 9, compared with the five-year (2015–19) average net injections of 87 Bcf and last year's net injections of 102 Bcf during the same week."

Net HDD and CDD changes from normal -4 or almost dead on average weather


I think we are finally having our day and Mr. Market is seeing this.
Ross Hendricks profile picture
Well said @Milkweed. Storage injections looking good, nice pricing across both the futures curve and the gas equities. All systems go!
Greenhorn Investor profile picture
Thank you for the article @Atlas Research. It was very informative.
Milkweed profile picture
Another tour de force Atlas! I'm just sorry I missed it when it came out. I think the most apt description of FED attempts to stimulate during downturns is pushing on a string. Econ 101 the economy is cyclical and we ALWAYS eventually recover and the FED takes credit which leads to my favorite description of policy makers taking credit for the economy:

"It's like some guy standing at the end of an airport runway jumping up and down taking credit for planes landing."
Ross Hendricks profile picture
Lol many thanks Milkweed. This time could be the ultimate "pushing on a string" experience, given that there's simply nothing the Fed can do to kick-start demand in the midst of a pandemic. Things will get really interesting in the next few weeks if the Italy/China/South Korea movie starts showing up in the U.S. and entire cities go into lock down for containment. The Fed is absolutely powerless in that scenario.
Lockdowns were possibly effective in China because of the authoritarian government enforcing shelter in place measures at their epicenter.

If global reporting is correct, the number of deaths in the US is already the highest in the world at this point. The freedom of movement continues to happen despite governmental encouragement for people to become socially distant. We don't have the same authoritative enforcement here in the US. Odd, considering that during natural disaster such hurricanes or floods, curfews are often imposed. Similar enforcement is not the case with COVID-19 and arguably more necessary.

On March 28th at 3:39 AM PST, these are the COVID-19 statistics:

Globally, Total Confirmed Cases: 602,262
US: 104,837
China: 81,996

Global total:
Deaths: 27,889
Recovered: 131,854

US Total:
Deaths: 1,711
Recovered: 894

China Total:
Deaths: 3,299
Recovered: 75,099

All of the numbers above are out of date by the time you read this post. The numbers are transcribed here to give perspective at a later date when the numbers are sure to be higher.

Johns Hopkins University has current metrics:

Ross Hendricks profile picture
@Dan_43210 Yes the U.S. policymakers continue to fail in pushing the necessary, mandatory quarantines needed to stop the spread. We're only as strong as our weakest links, and many places throughout the U.S. remain open for business with domestic travel allowing transportation of the virus unimpeded.

That's why the U.S. has become the biggest global outbreak center, and there's no indication that we're taking the steps needed to stop the spread - we're only slowing it, but that's not enough. Trump talking about reopening the country by Easter is a total pipe dream if we have any hope of containing the virus for good.
Many in the US will just keep working sick or not as they don’t have insurance or paid sick leave. Might be just the opportunity Dems need for a sweep.
stonkless profile picture
"The best estimates now of the overall mortality rate for COVID-19 is somewhere between 0.1 percent and 1 percent. That's lower than you've heard probably in many reports," Assistant Secretary of Health Brett Giroir said Thursday during an appearance on Capitol Hill.
Ross Hendricks profile picture
Maybe it is, or maybe it's closer to the current WHO estimate of 3.4. The truth is, neither you nor I know with any certainty. But what most experts do agree on is the 15 - 20% case complication rate that requires hospitalization. That's the number that matters here, for the reasons discussed in the article.
Ross Hendricks profile picture
It's comforting to see the recovery rate going up, and the fact that the mortality rate is low among at least the young part of the population. That still doesn't mean the disease can't disrupt entire economies when it starts spreading aggressively. We just saw Italy lock down 25% of its population in response to less than 6,000 cases. I would not be surprised to see that kind of case load here in the U.S., followed by similar quarantine measures.

In that kind of scenario, I think there's a lot more risk to equity prices... but eventually, there will be great bargains created from what will likely be a short-term dislocation.
Hi, nice compelling article. So you're saying the S&P can come down 50% from the highs. That's a worst-case scenario, right? If you had to guess, on average, how far down do you think we're actually going to go?

I notice in an article you wrote about a year ago, you were calling for weakness in equities in 2019, which did not end up panning out. So I have to ask, what could possibly happen now that would subvert your expectations for 2020?
Ross Hendricks profile picture
Yes you are correct... what I got wrong back then was not the fundamentals (as earnings and economic data rolled over in 2019), but rather I failed to appreciate the lengths that central bankers would go to to prop up asset prices (i.e. 3 Fed rate cuts and adding half a trillion to their balance sheet).

The biggest threat to my thesis would be more reckless central bank intervention that forces money into the stock market, regardless of fundamentals. However, if we truly go into an economic downturn, history shows that even aggressive central bank easing might not keep stocks from losing a lot of money (as we saw in 2000 - 2002 and in 2008).
Good article but respectfully disagree. The composition of stocks today vs 2008 and 2000-2002 is vastly different. The market has been fairly discerning in punishing the stocks that deserve to be down (travel, retail) and the stocks that don't (tech). A 10-20% drawdown for the broader index is fair.
Ross Hendricks profile picture
I agree that we might not see as steep of a loss this time around, not because the fundamentals are any better, but because of the unprecedented $6 trillion+ in monetary/fiscal stimulus measures that were announced after this article was published. If enough money floods into the financial system, we could see nominal gains in stock prices...
stonkless profile picture
Only if you're 70+ years old or very sick already is there anything to worry about. But saying it's just straight up 3.4% is careless. (Edited)
Ross Hendricks profile picture
Maybe you should tell that to the World Health Organization who put out those numbers... it sounds like you obviously know more than them.
stonkless profile picture
i did and they replied "sorry we will correct that number right away"
and offered me a complimentary box of Cheerios
stonkless profile picture
It's not 3.4% mortality for the vast majority. It's mild for most. However it's only about 3.4% of authors that would actually write that because it's not as dramatic
Ross Hendricks profile picture
I'm using a WHO estimate... but like I said, focusing on mortality misses the point. It's about the devastating impact on our medical system from the extremely high hospitalization rate that makes this virus a big problem.
stonkless profile picture
we'll be fine. maybe 5% or so lower. buy the dip.
Ross Hendricks profile picture
I agree it's a fixable problem, but the solution - aggressive quarantines, like what we've seen in Asia - means a big hit to economic growth and corporate earnings.
150 * 16 = 2,400

Our 55+ population in the US seems most at risk for severe symptoms requiring a hospital stay. No one’s idea of a good time, and certainly not worth getting on a boat or an airplane for Spring or Summer vacation. Throw in those folks with hypertension and/or diabetes and/or lung disease and/or heart disease, and you’re talking about a good chunk of total US Consumers.

Can’t see how a MILD recession isn’t the Base Case, looking down the road.

1 - (2,400 / 3,000) = 20%

With the VIX term structure looking the way that it does right now, a drawdown of this magnitude is quite possible, especially given the technical set-up, SPX option dealers being short downside puts (thus getting shorter Gamma as SPX moves lower), and trend follower models flipping to short positions from long. Throw in the inevitable Retail Investor puke after hanging on too long from the top...

Remember the consumer paralysis after 9/11 ? Made for a rough 2002-2003 in SPX returns.

A vaccine is imminent. Yes, a mild global recession, but it will pass quickly. No prolonged bear market.
Ross Hendricks profile picture
Vaccine is not imminent. It takes months of clinical testing to determine a) whether the vaccine works and b) what potential side effects it can create. Many examples of history where vaccines create worse symptoms than the disease its trying to cure.

Meanwhile, why haven't we developed a cure for the common flu? Because RNA-viruses (like the flu and the Coronavirus) mutate constantly, which is why we see many different strains of the flu showing up every year. Thus the strain you were vaccinated against often fails to protect you against dozens of other strains that you might come into contact with.

Pinning your hopes on a vaccine is foolish... if anything, our best chance is simply to pursue aggressive containment/quarantines to stop the spread. A vaccine is a pipe dream anytime in the next few months.
Oracle Of Alpha profile picture
Such a fantastically well written article! I shorted SPY a few weeks ago (November 20 expiration, very lucky with the timing) and you've succinctly gone over most of my reasoning while also adding several others I hadn't even considered. It's also really nice to see an accurate analysis of the threats CV poses, the misconceptions you mention are so uncomfortably common.
Completely agree, excellent article. I also got lucky enough to get into several shorts a few weeks back. This article makes me want to double down. Hope everyone stays safe and healthy.
Ross Hendricks profile picture
Thanks for the kind words! As far as shorting goes, it can be very profitable, but it's also a very tough way to make money... the counter-trend rallies, even during steep bear markets, can be vicious. It requires great timing and a little bit of luck.

Alternatively, gold/silver could offer a potentially easier way to hedge economic distress. We know exactly what central bankers will do (and already are doing) in response to even a hiccup in growth or asset prices. That should provide a continued bullish tailwind for gold, silver and the miners in my view.

@Oracle Of Alphahow did that work for you?

06 Mar. 2020
Thanks for the excellent article. I would like to add that the ICU occupancy in most developed countries is above 60% and the treatment of critical Corona cases takes 2 to 4 weeks. There is little spare capacity.

With the current response strategy in the US and Europe the virus will saturate the system within 30 to 60 days. 70%+ of the responders will get infected which will have a negative impact on moral. Freely reciting Yeats, with the current level of readiness the "The center cannot hold".

Edit: Just read the comment of poster @Vinci1452 who said it a lot better than I could. Well worth reading.
Ross Hendricks profile picture
Precisely, it's exactly this lack of excess capacity that poses the biggest challenge in dealing with the Coronavirus. Meanwhile, without excellent sterilization/quarantine procedures, CoV could spread like wildfire throughout the hospital system, like what happened in Wuhan when thousands of doctors got infected and further stressed their medical system.
Excellent perspective and scenario analysis. Cheers.
Excellent article. It shows, using conservative estimates, how this stock market has been running on hype for quite some time.
The article left me with the impression that the author is leaning slightly towards
being bearish.
Ross Hendricks profile picture
Just a bit! Although there are bargains to be found
Another common trope is "hepatitis kills far more people in the U.S., so why worry about the coronavirus?"

So let's look at some data and consider what science can tell us about the potential consequences of the Covid-19 virus spreading as widely as conventional flu viruses.

The fallacy made by the complacent is that the number of cases will remain small (in the dozens or hundreds) and so the number of deaths will also remain small.

Since the evidence suggests the Covid-19 virus is more contagious than conventional flu viruses, a reasonable assumption is that it will eventually infect more people than a conventional flu, which according to the CDC infects up to 45 million Americans annually.

According to the CDC, viral hepatitis B caused 5,600 deaths in the U.S. in 2017, and hepatitis C caused 19,000 deaths, for a total of 24,600. That certainly exceeds reported deaths of Covid-19, but since the statistics presented by the Chinese government are unreliable, we have no idea how many people have the virus and how many have died.

According to the CDC, influenza and pneumonia together caused 55,000 deaths in the U.S. in 2017.

Given the scientific evidence that Covid-19 is highly contagious, let's do a Pareto Distribution (80/20 rule) projection and estimate that 20% of the the U.S. population gets Covid-19. That's 66 million people, roughly 50% higher than the 45 million who catch a flu virus in a "bad flu" season.

Data suggests between 2% and 3.4% of all Covid-19 cases end in death, but the deaths are concentrated in the 20% of cases that become severe, and in the vulnerable populations within the 20% severe cases that require hospitalization.

Using the lower CFR (case-fatality rate) rate, 2% of 66 million is 1.3 million, so if Covid-19 infects only 20% of the U.S. populace, current data suggests 1.3 million people will die. This is considerably more than 24,600,or 55,000. (Total annual deaths in the U.S. are around 2.8 million.)

But these mortality data are drawn from small numbers of patients who have had access to intensive care. Anecdotal evidence from places where the healthcare system has been overwhelmed (Wuhan) so intensive care is unavailable to the majority of severely ill patients suggest much higher death rates around 15%, with worst-case scenarios going as high as 80% mortality for untreated severe cases in vulnerable populations (elderly and chronically ill).

If 20% of all cases can be expected to be severe and require hospitalization/intensive care (20% of 66 million is 13 million people), then intensive care will quickly become unavailable due to the low number of intensive care beds in the U.S. (94,000). The total number of all hospital beds in the U.S. is around 931,000. (Recall that the majority of these beds are already in use, so the number available to those severely ill with Covid-19 is a fraction of the total.)

If 15% of untreated severely ill patients die, that is 13 million X 15% = 1.95 million.

So let's cut all these numbers in half: let's assume only 10% of the U.S. populace gets the Covid-19 virus (33 million), so only 6.6 million people become severely ill. If 15% of untreated severely ill patients eventually die, that's 1 million deaths in the U.S. alone.

In other words, the death rate is only low if the number of severely ill patients remains very low. Once the number of patients needing hospitalization exceeds the number of ICU beds, the death rate leaps dramatically.

All this assumes there are not already more lethal variants in some human populations, and it also ignores the issue of re-infection: A tour guide in Japan tested positive for the coronavirus for a 2nd time, less than a month after recovering.

Authorities are well aware of the potential for the Covid-19 to spread rapidly and cause a great many deaths. But they're also concerned about the consequences of an economic crash as people avoid public places (i.e. "social distancing") as the most effective preventative measure to reduce the chances of contracting the virus.

The resulting layoffs and business closures will trigger financial and economic consequences that may not be recoverable if these trends self-reinforce (more layoffs cause consumption to decline, triggering more layoffs, etc.).

I wrote about this on February 11: China's Fatal Dilemma.

If authorities downplay the Covid-19 pandemic and encourage people to continue flying, gathering in public, etc. in order to keep the economy humming, that will accelerate the spread of the virus.

When people awaken to the dangers of the pandemic (for example, when ICU beds are all filled and severely ill patients are being turned away), they will panic and pursue "social distancing" regardless of what officials say. When complacency gives way to panic (yes, it can happen here and yes, it can happen to you), the economy will crash.

In other words, the economy will crash either way: if authorities force "social distancing" to limit the spread of the virus or if they downplay the pandemic and let the virus spread to the point that people panic and "socially distance" themselves regardless of official entreaties to get out there and buy, buy, buy.

Forcing "social distancing" won't stop the eventual spread of the virus, because as soon as restrictions are eased the virus will enter the newly open cities via asymptomatic carriers and a second wave of infections will spread. Forcing "social distancing" while thousands of airline flights and railway travel continue to spread asymptomatic carriers to every transportation node on the planet is not going to stop the spread of the virus.

The science suggests a significant percentage of the human populace will eventually get the Covid-19 virus. Estimates run from 40% to 70%; You're Likely to Get the Coronavirus (The Atlantic).

Common sense suggests complacency is misplaced, and efforts should be made to minimize the risk of getting the virus until a reliable vaccine is available, which those with experience in the field suggest might be a year or 18 months away.

The science is telling us that the global economy will experience a depression as these realities sink in. Authorities pushing complacency as a short-term financial panacea are doing an enormous disservice to the people who entrusted them with power. The more effective strategy would be to prepare to deal with a global depression while limiting the spread of the virus by whatever means are available, which at present boils down to social distancing and increased hygiene.
WELL SAID. The majority of investors, and humanity in general, are drastically underestimating how severe this situation is. When was the last time multiple 1st world nations closed their ENTIRE public education systems?
Detailed expert medical analyses out today suggest that Corana virus is LESS contagious than the flu and carries about the same mortality rate. It appears to affect children only mildly. Economically however, it is much more dangerous than the flu.
This is a lie. Cite a source on this. South Korea has the lowest mortality rate hovering around 0.7%, still making it much more fatal than the common flu, which carries at 0.01% mortality rate.
DAL is up today so obviously all is well ...
This is a very well written article BTW. There are some data points that suggest the mortality rate quoted by the WHO of 3.4% could be overstated. A leading Harvard Physician, Dr. Jeremy Faust suggests it's less than 1%, primarily citing the Diamond Princess cruise ship stats. 705 out of 3711 passengers caught the virus (19%), 6 people (all over 70) have died putting the mortality rate at 0.85%. More than half that were infected haven't shown any symptoms.

A glimmer of hope perhaps.
I think it's likely that in developed countries, the mortality rate will be much lower than in developing countries, kind of like with measles. But the article was pretty clear that mortality is not the big danger here. From a health perspective, it's over-run hospitals. From an economic perspective, it's a stock market that had been priced for perfection, and which was ignoring much reality, meeting a black swan event.
Ross Hendricks profile picture
It's not the end of the world, it's just that the broader stock market has only started to price in the downside risks to economic growth from the Coronavirus fallout. That said, I do believe bargains have appeared in the recent sell-off.
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