Monday, April 20, 2020

The Current Market Like 1987 Or 2008/2009?

Investors and the market are entering peak earnings season and with futures down this morning, it seems investors may be facing a buy the rumor sell the news type of market. The crash in oil prices, with NYMEX crude down 35% to $11.77 per barrel, is adding to the negative market sentiment. Up until this peak earnings period for the first quarter, the S&P 500 Index rose over 28% off the March 23 low as of Friday's (4/17/2020) close. The speed of the market decline from February and the subsequent speed of the move higher seems at odds with the business environment facing companies. As is often said, the market is not the economy. Investors are now faced with answering the question of where the market is headed from here.

One significant waterfall market decline occurred on Black Monday in October 1987. The steepness of the decline can be seen with the maroon line in the below chart. The blue line represents the current coronavirus market movement and it is following a similar pattern to the 1987 market and subsequent recovery. The green line represents the market trend from the recent financial crisis. I do believe a maroon line retracement for the current market is possible; however, the key will be getting the economy reopened. The market's bounce from the March low is significant and digesting this gain is a reasonable expectation. 

An improving economic environment will be key in seeing the market trend higher from any pullback or consolidation. Clearly the economic data is horrible, but a reset of expectations is occurring. Due to the speed at which businesses have been negatively impacted, much of the economic data has not caught up to current events due to the lag in collection and reporting. Under most normal times this data lag is not consequential; however, at times like the present, having better insight is important. To help address this the Federal Reserve Bank of Philadelphia maintains an index, the ADS Business Conditions Index, which is designed to provide more current insight into business conditions by updating economic observations at a high frequency. The index includes monthly payroll information, personal income data, monthly industrial production, and more. The average value of the index is zero. For example, a reading of less than -3.0 would indicate business conditions are worse than any time during the 1990-1991 or 2001 recession. As seen in the below chart the index is significantly negative; however, improving or becoming less negative. Much work needs to be done on the economic front and getting the economy opened is obviously the key.

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