There was a lot of frustration from the bears last week as the equity markets, as measured by the S&P 500 (SPY), $282.83 current market price, continued their relentless climb from the post bear market closing low of $222.95 on March 23 and even reached almost $295 last Wednesday, a scant -7.9% from where SPY ended 2019 at $321.85. Still, that's almost a 32% rise off the lows.
How is this happening in an economy that has now lost 30 million jobs over the past six weeks while consumer and business spending has essentially shut down? Well, if you go back to what's now called the Great Recession of 2008-2009, there were many periods in which the market rose up to 20% or more even though we were in a bear market.
So, who's right? Has a new bull market begun or will we crash once again? I say both may be right though perhaps not to such extremes. I'm still of the mind that even though the catalysts of this bear market are much different than the Great Recession of 2008-2009, one could still expect that the steps toward emerging from this bear market may just be the same.
If you look back to September of 2008 to the low of March 9, 2009, this roughly six-month period represented the most volatile days and months of the financial crisis as well as when the US government and the Federal Reserve became much more aggressive in bail out programs and economic support. Sound familiar?
Here is that roughly six-month period divided out into three tables of roughly two months each. This is in chronological order starting on Sept. 2, 2008, showing the daily percentage changes in SPY and highlighting in the far-right column any day or series of days that saw a 5% or more change in depreciation down (red) or appreciation up (green):
If you count them up, there were 15 red periods but also 10 green periods, which is surprising considering the S&P 500 dropped -46.0% during this six-month period, including two dividends worth $1.41.
And even though the housing and sub-prime mortgage crisis already was at its tipping point in early 2008 in terms of what was to come, the markets had still largely dismissed the danger as manageable. In other words, from Jan. 1 to Sept. 1 of 2008, SPY had dropped only -11.0% so again, it was really during this six-month period shown above, which extended into 2009, where most of the damage was done.
Similarities and Differences
Why do I think we may follow a similar path as what we saw back in 2008-2009 despite each crisis having completely different origins? It has everything to do with the response to the crisis and the similarities that we are seeing today from Congress and the Federal Reserve as we saw during the Great Recession of 2008-2009. In other words, history may not repeat itself, but it often rhymes.
If you took the first six weeks of the 2008-2009 period above, say from September through October 10th, the S&P 500 dropped -30.8%. Let's compare that to a similar six-week period of time this year starting from the low of March 23 when SPY closed at $222.95 and backing up to Feb. 10 when SPY was at $334.68.
This essentially covers the time in which the coronavirus had really begun to make a name for itself, and though it had yet to really take root here in the US, the equity markets had begun to price in the gravity of the situation as countries around the world began to shut down. This is not unlike what happened in September of 2008 when the markets started to realize the gravity and extent of the sub-prime mess and by Sept. 29 had dropped -13.3% after bouncing around most of the month of September.
Compare that to the February to early March time frame of this year when SPY dropped -11.2% from its all-time high on Feb. 19, accelerated by the Federal Reserve's emergency rate cut of 50 basis points on Tuesday, March 3, ahead of their regularly scheduled meeting. This seemed to panic the markets even more, not just because the Fed didn't wait until its regularly scheduled meeting but also because of the unexpectedly large size of the cut.
Then on March 16, the Federal Reserve cut for a second time, and this was a whopping 100 basis point cut, which only seemed to panic the markets even more. It was on this day that I reflected back to the fall of 2008-2009 when the Federal Reserve was also actively lowering rates and was also forced to make its last emergency rate cut as well. That was on Oct. 8, 2008, when the Fed cut 50 bps. CNN Money had this to say about the current situation:
The rate cuts are the latest in a series of groundbreaking moves by the world's top central banks to try to breathe life into embattled financial markets. And it's a sign that the problems in the U.S. economy are spreading.
Sound familiar? And while the Federal Reserve was doing all it can to keep the wheels turning on the US and global economy, the US government was about to getting much more heavily involved as well.
On March 16, I wrote this article, Equity CEFs: Federal Reserve Cuts 100 Basis Points, and included to my subscribers my thesis that the rapid progression of the coronavirus was not unlike the domino effect that we saw back in 2008-2009 during the height of the sub-prime mortgage crisis and that this may trigger a similar reaction from the Federal Reserve and federal government. And if I was right, there would be much more aid and stimulus to come.
Because back in September/October of 2008 when the sub-prime mortgage crisis was spreading (like a virus) to all the capital and credit markets around the world and Lehman Brothers had just declared bankruptcy, Congress was being implored by then-Treasury Secretary Hank Paulson to pass a $700 billion program that would essentially purchase these "troubled assets" and bailout institutional holders. This program was called, not surprisingly, the Troubled Asset Relief Program, or TARP, and was finally approved by Congress (requiring a second vote) and signed into law on Oct. 3 by President Bush.
And what do we have to compare with that today? Ten days after I wrote my article above, Congress came together and passed the $2 trillion Coronavirus Aid, Relief and Economic Security Act, or CARES Act, and President Trump signed that into law the same day.
So, going back to that six-week period in 2008 compared to today, does it sound like the initial responses by the Federal Reserve and the Federal Government were eerily the same? I would say so, but how did the markets react:
|Start Date||End Date||Start S&P 500||End S&P 500||Dividend||% Change|
Surprisingly similar bear market drops that were the result of 1). a crisis picking up steam and hitting its apex and 2). A Federal response to the crisis from multiple agencies.
Now let's look at the period above from Nov. 20, 2008, when SPY closed at $75.45 to Dec. 16 when SPY hit a monthly high of $91.88 as more Federal Reserve and government stimulus packages and measures were being introduced.
Granted, this was a month after the fireworks from September/October and if you look at the second table above, you can see there were quite a few +5% to -5% days or periods as the markets struggled for direction. And just to be fair, the stimulus packages and rate cuts during the Great Recession of 2008-2009 began in early 2008 in response to the housing crisis but once again, I'm focusing on this six-month period when the crisis really hit a crescendo and when the stimulus and bailout packages were being made in earnest and in larger denominations.
During this next phase of stimulus and bailouts, the Federal Reserve and the US Treasury were initiating multiple programs that would in part purchase securities from FNMA and FHLMC and provide liquidity to the MBS markets, bailout the auto industry as well as provide liquidity and loan guarantees to the banking industry. The Fed eventually dropped rates to zero, which became known as ZIRP, or Zero Interest Rate Policy. At the same time, money-market funds were in need of infusions while the newly unemployed needed their benefits extended. In fact, millions had lost their jobs and were turning to the government for help. Does all this sound familiar?
This was obviously a difficult period for the markets but after the initial crash period and settling out, the markets all of a sudden found new life and rose back up, convinced that all of the stimulus and aid programs from the Federal Reserve and US Government would likely mean that the worst of the crisis was behind them. Sound familiar again?
And so, for the roughly one-month period from 11/20/2008 - 12/16/2008 (see above), SPY rose 21.8%, as green shoots became the mantra to brighter days.
And if we compare that roughly one-month period to the rise from the lows this year from March 23, we have risen 25.2% from $222.95 to last week's April 23rd close of $279.08, not that far from today's $282.83.
|Start Date||End Date||Start S&P 500||End S&P 500||Dividend||% Change|
Again, a similar rise back up over a similar time frame. Sound familiar?
What Happens Next?
This essentially gets us up to today which I would equate to around Dec. 16, 2008, shown on the 2nd table above. So, if you're buying into this thesis that we continue to follow the same road map back from 2008-2009, then it looks like we're due for a brief pullback though nothing serious.
Of course, we are still a long ways from over and we may or may not re-test the lows as shown in the third table when SPY dipped back to the $75.00 re-test level on Feb. 23, 2009, before hitting its low two weeks later on March 9 at around $68.00.
And herein lies the problem with this crisis and why it's so difficult to handicap, though obviously many Seeking Alpha contributors will continue to try. Back in 2008-2009, the mortgage and credit market hole was something you could wrap your head around and knew that if you just threw enough money into it and gave it enough time, eventually you would overcome it.
This is a different beast altogether that could potentially change our way of life going forward. Amazon (AMZN), $2,286.04 current market price, gave us a hint of that in their earnings report last week when they said that next quarter's earnings will go from an expected profit to a loss due in part to the steps and safety measures the company is going to have to incorporate into their cost of doing business to make their workplaces and fulfillment centers safe.
How many other companies have even begun to address this in terms of its financial impact? Think about what hotel and motel companies, malls, restaurants, cruise ships, airlines, health clubs, etc., are going to have to do to invest in and maintain their places of business to make their employees, vendors, tenants, members, and guests safe. These will come in the form of new business environments, new business practices as well as new rules and regulations from local, state, and other jurisdictions. How much is all this going to cost? Probably more significant than anybody has budgeted for.
And how are cities, states, and other municipalities going to get by in the new normal? If you think it's going to be difficult for businesses to absorb these expenses, imagine how difficult it is going to be on municipalities with cratering sales and income tax revenues and skyrocketing unemployment and healthcare costs.
The bottom line is that I believe Congress and the Federal Reserve are going to have to do a lot more, maybe trillions more, before we get past this and it may also include a whole new way of life altogether.
The saying goes the Fed can cure the credit markets and it can cure what ails the stock market too but it cannot heal what may eventually become the lingering malady in all this, and that's a consumer that doesn't want to or doesn't have the means to spend like they once did.
Nobody knows where this market goes from here and so much of this crisis depends on the virus itself. Will there be a vaccine before year end? Will we see a spike up in cases as America re-opens for business? Will the virus return this fall?
There have been many bull and bear market theses for what happens next but the fact remains, this crisis is unlike anything we've seen before. Nobody has a crystal ball because nobody knows what the virus will do next. For that reason, I'm sticking with the only factual timeline we have to go on since whether it's a sub-prime financial meltdown or a virus economic meltdown, the cause may be different but the effect is the same.
History may not repeat itself, but so far, it has certainly rhymed.
Thank you for reading my article. My goal is to give you observations and actionable ideas in Closed-End funds while educating you on how these unique and opportunistic funds work.
CEFs can be one of the most exhilarating and yet most frustrating security classes to invest in, and it's important that you have someone who can be a level head during up and down periods of the market. I hope to be that voice of calm when necessary. ~ Douglas Albo