After an incredibly strong, bull run — the longest in history, that lasted 11 years, the S&P and Dow hit bear market territory. This fall from the sky was the quickest the market has ever gone from an all-time high to bear market territory. It has investors and traders everywhere asking, “What happened?!” I discussed this anomaly on Fox Business while I was in New York City last week.
Essentially, the market typically ebbs and flows, however, from especially October of 2019 to February of 2020, the stock market almost melted up higher, with investors and traders piling into equities. Everybody wanted a piece of this phenomenal bull run.
But, the problem is, it was too euphoric. When the market gets taken over by high emotion, either to the upside — or downside, that is when disaster ensues. Too many traders and investors were long, and when panic due to the coronavirus started, investors pulled their money out — and quick.
Think about what happens when there is a string of dominoes — one falls, and it takes down the rest. When panic selling began, it hit the market like a wave, causing many people to pull their money out, all at the same time. This is how a 23% down move can happen in 3 weeks. So, of course, the question everyone wants the answer to, is “When is this going to end, and when, or if, is going to go back up?”
Well currently, the market is trading purely based on emotion, as panic takes over the world. We have people stockpiling toilet paper, soap, huge events being cancelled, along with universities and schools. Initially, this was an emotional reaction to the COIVD-19.
The problem is, now, there is a critical economic impact happening. This is why I believe the bottom is not here, and we will continue to see extreme volatility and lower prices. The panic over the virus is just now hitting the States, when Italy and China have been dealing with this for weeks. As people stop going to school, work and social activities, economic activity wanes. Those people aren’t spending money at restaurants for lunch or getting cocktails after work. That means that companies lose money.
When it gets bad, they either have to lower staffing, lay off workers, or even close doors. We are already seeing this in the airline industry, with United Airlines in particular noting the they are asking employees to take voluntary leave. It’s also hitting the restaurant industry in Seattle and NYC. Restaurants are low margin businesses as it is. When they see a sudden 60-70% drop in profits, they can’t pay their staff. So, while this started with people choosing not to spend money, the way it gets worse is when people literally cannot spend money, because they aren’t making enough.
Consumer debt is something we have discussed many times in this newsletter. Click the hyperlink below to read my article from last summer where I discussed this. https://fivestartrader.wpengine.com/what-to-do-with-debt-bubble/
Levels of consumer debt are at the highest they have ever been in history, even worse than during the 2008 financial crisis. People have credit card debt, student loan debt, mortgage debt, and businesses and corporations have debt as well. The true crisis will come if and when the economy slows down to the point where people cannot make their debt repayments, and at some point, it will implode. This is why I am very concerned about not only the actual coronavirus, but the economy and stock market as a whole. If we can control this virus, by staying home, finding a vaccine, educating people, then potentially the stock market can recover soon. However, the longer people stay home, the more likely we are to fall into a recession and the stock market will continue to take a hit.
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