Goldman Sachs studied every bear market in stocks since 1835 - and concluded that 3 red flags make this coronavirus-driven one unlike any other in history
- US stocks plunged into their 28th bear market since 1835 on Thursday, ending a record-setting bull run.
- Goldman Sachs classified this episode as an "event-driven" bear market caused by the new coronavirus.
- Three things make this one unique: the virus, its infection rate, and the low level of interest rates.
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The benchmark S&P 500 plunged into bear market territory on Thursday, ending its record-long bull run that had lasted 11 years.
A day earlier, the Dow Jones industrial average closed more than 20% below its record after the World Health Organization declared the novel coronavirus a pandemic.
These declines mark the 28th bear market in US stocks since 1835, data compiled by Goldman Sachs shows. And while these events are not new, at least three key features of this one make it unlike any others in history, according to Peter Oppenheimer, the chief global equity strategist.
Before diving into those caveats, they outlined some of the common threads.
One feature that the ongoing bear market has in common with some of the others is that it is event-driven. That means it was triggered by external, one-off shocks like war or an oil crash. In this case, investors are worried that the coronavirus pandemic is hurting an economy that had been doing just fine.
Another similarity is that the speed and recovery of event-driven bear markets like this are the fastest. Indeed, the Dow's latest 20% drop was the fastest in history, taking just 20 days to descend from all-time highs to a bear market.
One more commonality that may bode well for this episode is that event-driven bear markets usually occur in stable monetary environments that lack significant inflation or deflation.
"To some extent it was this more stable monetary environment that prevented the event from causing the stresses that would have turned it into a more sustained bear market," Oppenheimer said in a recent client note.
But that's where the similarities end. Oppenheimer identified three caveats that make this bear market unique:
1. No other event-driven bear market was triggered by a virus or disease outbreak.
Prior episodes were usually financial in nature, like the collapse of Long Term Capital Management or the use of portfolio insurance on Black Monday in 1987. In effect, it was easier to gauge the effectiveness of monetary policy in bringing stability back to markets.
This time, unfortunately, interest rate cuts will not prevent the new coronavirus from spreading, although it may lessen the shock to consumer spending.
2. No other event-driven bear market occured when interest rates were this low.
The Fed's emergency rate cut by 50 basis points last week has proved to be insufficient.
Traders now see a 96% probability that the Fed will return its benchmark rate to a record-low 0%-0.25% range next week, according to the CME FedWatch Tool.
3. Markets tended to rebound after previous disease outbreaks showed signs of improvement.
Oppenheimer cited the SARS outbreak in 2002 as an example. While it did not cause a bear market, it demonstrated that investors' optimism can improve when the infection rate slows.
But the morale is unlikely to improve this time. While China has seen a drop-off in its rate of new coronavirus cases, the virus has gained momentum elsewhere.
"The fear factor around the economic shock from preventative measures may push markets further down in the meantime," Oppenheimer concluded.