History’s Fastest Crash Is the High Price for Unbridled Optimism
(Bloomberg) -- It’s a stat so shocking that it’s difficult to believe: In a century spanning the Great Depression and Financial Crisis, the current correction is the fastest ever. To understand how it happened, you need to recall how euphoric markets very recently were.
Hard as it is to remember now, as recently as two Wednesdays ago, with coronavirus headlines everywhere, Apple Inc. was capping off a rally that had added $600 billion to its value in eight months. Lookalike runups in all manner of tech megacaps pushed valuations in the Nasdaq 100 to a two-decade high. In just three months, Tesla’s market cap shot from $40 billion to $170 billion, while a pack of dodgy microcaps, hawking space vacations and fuels cells, were trading hundreds of millions of shares a day.
Moves like those drew speculators by the droves, armed with commission-free brokerage accounts and tipsy on cheap options. Some of those investors are getting their first real taste of pain. That the cause is an intractable pandemic that has defied every effort to contain it helps explain why the 11-year-old rally is suddenly at risk.
For the bull market to end, the S&P 500 would have to fall another 9% to 2,708.92, a level it last touched in February 2019. In terms of progress on the calendar, that’s a relatively short period to undo. Compare to late 2018, the nearest the bull has come to expiring. Plunging 20% from its then-record required retracing 17 months of gains -- about 40% longer than now.
“Things just moved very fast in both directions,” Mike Stritch, chief investment officer at BMO Wealth Management, said by phone. “There is a growing possibility that it’s a much more disruptive event, and even potentially a bear market.”
Small investors, indifferent participants for a decade, came streaming back to markets in the first weeks of 2020. Daily average trades at E*Trade Financial Corp. and TD Ameritrade Holding Corp. nearly doubled to all-time highs in January, data compiled by Sundial Research showed. After resisting equities last year, hedge funds were piling on risk. Their net leverage, a measure of industry risk appetite that takes into account long versus short positions, had one of its fastest expansions in years.
In options markets, traders were on a binge that fueled a 77% surge in the value of single-stock options traded in the first six weeks of 2020. Stocks beloved by retail traders drove the lion’s share of the increase, which was mostly one-way: bullish. The 10-day moving average on the equity put/call ratio, which falls as bullish bets multiply, dipped to 0.60 in late January, its lowest level since 2012.
So while the coronavirus is clearly the sell-off’s proximate cause, surging enthusiasm in the weeks and months before is accelerating it. From early October to last week’s peak, the S&P 500 jumped 17%, an expansion that should the bull market end now would qualify for the second-fastest -- at this late stage -- ever recorded.
Adding to the stress: things that seemed to be going the bull’s way are falling apart. The outbreak prompted Apple, Microsoft Corp. and Mastercard Inc. to slash sales forecasts. David Kostin, a strategist at Goldman Sachs Group Inc., now expects zero profit growth for S&P 500 companies after trimming his estimate by 5% to $165 a share.
Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, just traveled to six cities to visit clients and observed a clear shift in investors’ tone.
“The first thing that we noticed this week was a high degree of nervousness about the coronavirus and personal travel plans in particular,” Calvasina wrote in a note to clients. “If U.S. equity investors were sitting still last week, this week they were squirming in their seats.”
While the Federal Reserve is expected by some investors to lower interest rates again in March, whether stimulus can do anything to combat a shock to global supply chains and markets is debatable. Investors aren’t waiting to find out. As of Thursday, about 40% of S&P 500 members are mired in individual bear markets, traditionally defined as a fall of 20% or more.
Has euphoria been washed out to signal the rout has run its course? Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc., doesn’t think so.
“There’s a great deal of interest on where to find a tangible bottom,” he wrote in a note. “Investor discussions do not indicate heavy strain when people are asking when to get in and take advantage of weakness. Some level of disgust with equities may be needed for a buy signal.”
©2020 Bloomberg L.P.