- The corona virus downturn differs significantly from the past event-driven bear markets and is likely to hit stocks even more, Goldman Sachs said on Tuesday.
- The company has analyzed 27 bear markets since 1880 to estimate the length and depth of the current slump.
- Although current stock levels match the declines in past bear markets, factors that only apply to the coronavirus threat could lower prices even further, said the bank's chief strategist for global stocks.
- Here are four main differences between the corona virus decline and past bear markets, from historically low interest rates to the unpredictable nature of the pandemic.
- You can find more stories on the Business Insider homepage.
The "one-off" shock of the corona virus has brought US stocks to bearish territory faster than any other plunge into the past, and a handful of unique factors suggest that it will be more difficult than usual to recover, Goldman Sachs said Tuesday.
The bank has analyzed 27 bear markets since 1880 to estimate how long and deep the recent downturn will last. The recent decline in markets has led to an event-driven bear market, contrary to cyclical and structural declines throughout history, according to analysts. The corona virus triggered a leap of "unprecedented nature", and uncertainty about the future of the pandemic contributed to all-time high market volatility, wrote Peter Oppenheimer, chief strategist for global stocks at Goldman.
Even after the Dow made its biggest profit in 87 years on Tuesday, stocks are well below the bullish level as investors wait for the government to provide billions in tax relief.
According to the bank, shares fell 29% in the past and remained in decline for an average of nine months. However, they assume that the corona virus will resist the trend. Here are the four features that differentiate the current market from previous event-driven foils, says Goldman Sachs.
Uncertainty due to pandemics
Sgt.Amouris Coss / USA. Army National Guard / Handout / Reuters
No event-driven bear market example analyzed by the bank has been fueled by a global public health crisis, and the lack of precedents makes the markets appear less optimistic. Most of the downturns were triggered by market-specific events that allowed monetary policy to respond and reduce stress directly.
The coronavirus' economic impact cannot be easily remedied, Goldman said, and the rapid rise in quarantine activity is waning the effects of normal government stimulus measures.
"Rate cuts may not be effective in an environment of fear where consumers have to stay at home or just tend to stay at home," Oppenheimer wrote.
Historically low prices
Even if rate cuts could effectively free the economy from its virus-induced decline, the youngest bear market came as rates were already at historically low levels. The position left little room for central banks like the Federal Reserve to take "effective policy measures," Oppenheimer wrote. In countries with negative interest rates, the situation is getting worse, an economic experiment with little known long-term side effects.
Second stage infections
Antonio Masiello / Getty Images
In previous pandemics like the 2003 SARS, equity markets quickly recovered from lows as the infection rate at secondary outbreak sites slowed. While China has effectively curbed the contagion within its borders, escalating outbreaks in the US, Italy and Iran led to new sales as investors traded risk assets for safe havens.
The cessation of economic activity in Europe and the USA will continue to harm the markets before they recover. Historic amounts of fiscal incentives will be required to prevent the event-driven bear market from turning into a sustained downturn, Goldman said. The recovery from past crises has been fueled by the rapid return of consumers to regular activities, and the bank is unlikely to see such a recovery amid the coronavirus pandemic.
"In the meantime, the fear factor of the economic shock through preventive measures could push the markets further down," added Oppenheimer.
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