Is the Stock Market doomed thanks to Coronavirus?

I sure don’t think so. I’m an optimist. My hypothesis is that, based on historical data, we will see another dip down but then we will eventually see it recover to pre-crash and continue upwards — as it has always done historically. The stock market has patterns, and currently we are caught in one of those patterns. Think I’m crazy? Totally agree? Let me take you on a journey through the historical Stock Market Crashes as a means to identify the patterns and to consider if there are perhaps better comparisons.

The 1929 Stock Market Crash

Once considered the worst economic event in world history, the crash began on Thursday October 24, 1929. On October 28, named “Black Monday,” the Dow Jones Industrial Average plunged nearly 13% followed by another 12% on the following day “Black Tuesday.” By 1933, unemployment reached 30%.

What caused it? We had hit a peak during the Roaring Twenties with reckless investing. We experienced rapid expansion and hit record highs. Unemployment was down; the auto industry was booming. Many people believe the market and the public were overconfident. Stocks were thought to be wildly overpriced and people were buying stocks on credit. The government was also raising interest rates from 5 –> 6% which is suspected to have impacted investor enthusiasm, leading to instability and reduced economic growth.

Following the crash, the people began to panic. They rushed to the banks to withdrawn their funds but investors couldn’t return their money because the money was in the market. The press at the time, certainly didn’t help. They ran emotionally charged headlines in the Washington Post and New York Times reading “Huge Selling Wave Creates Near-Panic as Stocks Collapse,” and “Prices of Stocks Crash in Heavy Liquidation” respectively. Many say this crash lasted about 10 years and contributed to the Great Depression of the 1930’s but it truly didn’t recover back to it’s starting point until January 11, 1951. The Great Depression truly began in the 1930’s because the banks were speculating too much and extending too many bad loans, plus we had no deposit insurance at the time.

After the 1929 Crash, we don’t see the percentage change return to the mean and go positive until 1/11/1951.

1929 Crash Decline Highlights.

• DJIA decline: -46.6%
• Largest single day decline: -12.8%
• True recovery back to the mean and never below again: 254 Months
• Driver: Bad Banking

The 1987 Stock Market Crash

As a number of stars aligned to tank the global market, the DOW dropped 22.6% on October 22, 1987. The insurance program, portfolio insurance, had been created to solve a lot of problems. Steep price declines were a result of significant selling, resulting in volumes so large the computerized trading systems couldn’t process. These repercussions were also felt in the major world stock markets. In the 5 years preceding the crash, we were in a bull market and the DJIA had more than tripled in value. However, unemployment was at only 6%.

What caused it? It’s speculated that it lays in a series of monetary and foreign trade agreements, implemented in an attempt to depreciate the US Dollar and adjust trade deficits. We were also essentially at war with Iran. The government has also reported a massive trade deficit. Many also believe that the computer program-driven trading models were inflating the values prior to the crash leading to a steeper decline. In addition, once the rush to sell began, matter were out of the traders’ hands and the machines escalated the damage to the market.

As we saw in 1929, headlines began to read “A Financial Meltdown” from the SF Chronicle, and “PANIC!” from the Daily News to name a few. Many thought it was the start of the next Great Depression. Luckily, after February 11th 1988, the unpredictable slump ended and has never dropped back down.

After February 11, 1988 the closing stock value has still never fallen below the mean of the 1987 crash date.

What’s different? Many think of this crash as a hiccup, a market malfunction, that didn’t lead to a recession.

1987 Crash Decline Highlights.

• DJIA decline: -22.6%
• Largest single day decline: -22.6%
• True recovery back to the mean and never below again: 3 months
• Driver: Bad Banking

The 2008 Stock Market Crash

It all started with the unprecedented growth in the subprime mortgage market in 1999. By the fall on 2008, borrowers were defaulting on subprime mortgages in high numbers. Many people say you could see the signs coming in 2008. The headlines that year had mentioned the Great Depression twice as often as normal. On September 16th, Lehman Brothers declared bankruptcy. And on September 29, 2008, the Dow Jones Industrial Average fell a whopping 777.68 points. Unemployment eventually reached 10%.

What caused it? Starting in 2006, new home permits were 28% less than the year prior and falling prices began to trigger defaults on subprime mortgages. The housing bubble began to burst, which affected the banks and financial institutions who had bet on the continued increase in home prices. This caused turmoil in the financial markets, collapsing the stock market and resulting in a global Great Recession.

The news played a role here again with headings like “Lehman Collapse Sends Shockwaves around the world,” from the Times. “Worst Crisis since the 30’s, with No End Yet in Sight,” from the Wall Street Journal. Things were ary and getting scary. It took 15 months for this slump to end, and then it never went back below the crash dates closing value.

After January 8, 2010 the closing stock value has still never fallen below the 2008 crash date mean.

What’s different? This crash was a result of an internal bubble inside the financial system, which was addressable using monetary and fiscal stimulus.

2008 Crash Decline Highlights.

• DJIA decline: -53.7%
• Largest single day decline: -4.6%
• True recovery back to the mean and never below again: 15 months
• Driver: Bad Banking

The 2020 Stock Market Crash

It now brings us to the crash we are in today, enter Coronavirus. The global stock market crash began February 20, 2020. By March 9th the global markets were becoming extremely volatile with extreme contractions, as countries started to react to the Coronavirus and the oil price war between Russia and POEC. Global stocks have seen a downturn of at least 25% and 30% in most G20 nations. And now, only 51.3% of the population is employed, with an unemployment rate of 14.7%.

What caused it? It occurred mostly as a result of the COVID-19 Pandemic Coronavirus. Fear and global economic shutdown accelerated what was already brewing in 2019. Cracks were beginning to build for a long time. We say the yield curve invert (which sparked fears of a recession) in April 2019. A debt-bomb was also building as debt was 50% higher than during the Great Financial Crisis in 2008. Headlines start to read things like “Dow falls 1,191 points — the most in history,” from CNN or “U.S. Stocks Plunge as Coronavirus Crisis Spreads” from the New York Times.

What is different? We’ve never seen the world shut down the economy like this. It’s a matter of life and death against a sometimes silent virus.

2020 Crash Decline Highlights.

• DJIA Decline: -35%
• Largest single day decline: -12.9% (so far)
• True recovery back to the mean: TBD…
• Driver: Pandemic + Global Shutdown

How does the 2020 Crash compare?

[embed]All four crashes saw a rise after month one. Both the 2008 and 1929 crashes dipped again between months 7–8.

Here are the key differences between the crashes:

• The crash didn’t happen in the fall
• The world has never shut down quite like this before
• True recovery times back to the crash date mean varied wildly between 3–254 months
• The driver for the 2020 Crash was not bad banking

Here are a few common themes we found:

• The stock market always seems to get ahead of it itself before a crash; nothing goes straight up forever.
• Always seems to be some sort of financial contraption that gets unruly
• Every crash has an external catalyst (outside of finance)
• Charged news and headlines incite panicked behavior
• Eventually, they always recover

Secondary Hypothesis:

• Although we do see some similarities, there are also anomalies in the current crash. The most noticeable is that it is not being driven by bad banking. Perhaps a better benchmark for prediction could be how the stock market behaved as a result of black swan events like the 9/11 terrorist attack or the 1918 Spanish Influenza.

The Stock Market during Black Swan Events

September 11, 2001

On a late summer day, on September 11, 2001, al Qaeda terrorists hijacked three passenger planes and carried out coordinated suicide attacks against the World Trade Center and the Pentagon causing 2,996. In the stock markets, it caused a sharp 14% drop and lowered consumer confidence. Almost 18,000 small businesses were shut down. To make matters worse, the economy was already suffering though a moderate recession.

This event changed the way we travel, ignited ongoing wars in the Middle East, and had a lasting impact on immigration and deportation.

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Although it’s early to tell, so far it follows the initial trend of dip and recover, but already in months 2–3 we’re already seeing a divergence.

The 1918 Spanish Influenza

During the Spanish Flu Pandemic of 1919, it’s estimated that over 500 million people were infected and 1.7% of the World’s population died (which would be the equivalent of 100 million deaths today). It occurred in the last year of WWI and had three waves: July 1918, October 1918, and February 1919.

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So far, although we’re only a few months in, and it’s already mapping closely to that of 1918. Based on the history from 1918, there are many speculations about a second wave of Coronavirus in the winter. We can hypothesize that there will be another dip, possibly about as low as before, and hopefully continues on the up and up from there(even if there is a third wave).

After discussing the data and findings with a colleague, it led me down a rabbit hole of visualizing how the Dow Jones compares to NASDAQ and S&P (nothing super notable), then I shared the new findings with my husband and we began deep-diving into inciting Black Swan events and ultimately left me considering the Consumer Confidence Index.

One last consideration — Consumer Confidence Index

The consumer confidence indicator that is meant to measure the optimism on the state on the US economy and provides an indication of future developments of households’ consumption and saving. It’s often used to predict broad economic turnaround including resumed growth in GDP.

[embed]It’s not looking good for us… However the 2020 Crash is clearly the anomaly and harder to predict.

The trends in the US Consumer Confidence Index show us that we may see an upswing and possible downswing again. Given the sharper decline of the 2020 Crash it’s hard to predict exactly what will happen - I’ll leave this here as a cliffhanger. As the months continue to pass, we’ll need to keep mapping it against these various trend lines. Regardless, I’m still optimistic that this too shall pass eventually!

Here is my compiled dataset.