Coronavirus is Ending Wall Street's 11-Year Bull Market

Over the course of the past two months, the coronavirus has become a global pandemic from what started off as a contagion in China. With a ripple effect on global supply chains and the closure of factories and retail outlets, it is evident that the world economy is headed into a recession. 

As of Monday, May 4, almost 3,600,000 cases of COVID- 19 have been reported worldwide, with over 250,000 deaths. Companies around the world have scaled back activity to accommodate government demands to limit social interaction. Travelling has been halted, borders are shut and hundreds of millions of people are in effective lockdown all over the globe. The crisis has erased trillions of dollars from global stock markets and imperiled the future of millions of small businesses around the world, along with the livelihood of vast number of wage earners. All of this has led to a massive selloff in the stock market, as investors, who initially underestimated the reach of this virus, started to realize how it has begun to take over the global economy. The results are evident from the year-to-date returns of the broad market indices, the Dow Jones Industrial Average is down 16.78% year-to-date and dropped 2,997 points during March, registering as one of the three worst one day price drops in U.S history. Although the markets started to recover this past week, large technology companies such as Amazon and Facebook missed the analysts’ earnings expectations. This indicated that not even big tech is safe from the pandemic, triggering a sell-off which caused the S&P 500 to tumble 2.8%. 

Most of the U.S. companies are dependent on China for a large portion of their supplies. However, as the Chinese economy is being crippled and pushed to the edge amid this pandemic, the effect is being felt on a broader scale by companies and economies that depend on them. Output at China’s factories slumped 13.5% in the combined January-February period from a year earlier, according to the statistics bureau. Retail sales slumped 20.5%; fixed asset investment, which is a measure of construction, fell 24.5%, and real estate construction slid 44.9%. All of these figures were much worse than analyst forecasts and also represented a contraction after positive growth readings in the earlier comparable periods. Not only is global supply coming to a halt, but so is global demand, as countries such as the U.S. and others in Europe, that consume Chinese output, have locked down their citizens. Despite the re-opening of factories in China, requests to cancel orders or delay shipments have flooded in, as global trade is starting to crumble. 

Following President Trump’s announcement regarding the prolonged time period for a lockdown, treasury yields plumbed to new lows, as investors increased their demand to these short-term safe haven assets. The U.S. Federal Reserve (Fed) and other major central banks all around the world have dramatically stepped up efforts to stabilize capital markets and provide liquidity by cutting rates to near zero as well as following quantitative easing. Investors fled riskier debt, in fear of highly levered companies failing to fulfill their promised interest payments. Troy Gayeski, co-chief investment officer of SkyBridge Capital, which oversees $9 billion said “You’ve gone from an environment where you think you can go into a mini bubble to…we could have a recession starting in March.”

As the U.S. has been in lockdown for over two months now, how long this volatility will last in the markets is debatable; however, as the days are passing, it is becoming increasingly apparent that the U.S. and global economy is headed towards a downturn, with first quarter U.S. GDP shrinking 4.8%, the worst drop since the Great Depression. Despite the injection of a historic $2 trillion stimulus package, the paycheck protection program and re-opening of certain essential businesses, the market has realized the inherent uncertainty behind this pandemic. If there is one thing that investors do not like, it is uncertainty – and that is exactly what’s causing the stock markets to tumble. Steve Chiavarone, portfolio manager with Federated Investors said it best, “This is different. The thing that is scarier about it is you’ve never been in a scenario where you shut down the entire economy. You get a sense in your stomach that we don’t know how to price this and that markets could fall more.”

This raises the question – is the economic impact of the coronavirus pandemic at its homestretch? Or will the “second wave” of infections amplify the economic scarring?