Commentary / Coronavirus

Breathe Deep – History Suggests Market Drop Will Pass

market An economist’s look across financial crises, short and inconsequential to highly disruptive, would tally about 26 or so in US history. Today’s market shudder is hardly a blip. Why? Four reasons.

First, like barometric pressure, financial crises come long and slow, then leave long and slow; or they come all at once – which often causes them to leave quickly unless the cause is a war. This is especially true when the cause of market shock is crystal clear, not confused, or mysterious.

Today, we know that the market is down for two reasons – panic over coronavirus, a mild but infectious virus with symptoms that can come and go unnoticed. Second, a temporary oil price bidding war, which has caused oil’s prices to fall.

What else? We know coronavirus is less concerning – on the numbers – than common flu, and will run its course shortly, whether all get it or few do. We know a drop in oil prices, as producers undercut each other, may adversely affect energy – but will help consumers. Consumers drive recovery, short or long.

Second, most sustained financial drops relate to unresolved structural issues. Those are not the cause of today’s fall. For example, the Kennedy slide of December 1961, a six-month correction, followed 30 years of more-or-less unbroken growth. Even then, markets stabilized after the Cuban Missile Crisis.

Likewise, structural issues – not health scare or oil bidding – were behind the October 1987 stock market crash. While the market fell 20 percent, we were wringing out the overhang of the Savings & Loan crisis, institutional weakness, lack of liquidity, and few market safeguards – that is, no checks or pauses.

Today, we have strong financial institutions, a strong economy, ample corporate liquidity, and numerous market-modulating safeguards, including a 15-minute stop after a seven-percent pullback, same after 13-percent correction, and market halt at 20 percent.

Third, by contrast to a mild virus, sustained market shocks follow overdue structural adjustments or global conflicts. This one is neither. It appears tied more to hyped fear, a psychological jolt, than to an underlying, hard-to-resolve structural or geopolitical issue.

By comparison, in July 1990, the market dropped 18 percent – as a result of a major war, when Iraq invaded Kuwait. Those markets recovered eight months later. After September 11, 2001, which triggered wars in Afghanistan and Iraq, markets were shocked for a year. These were major geopolitical conflicts, not a mild virus. The coronavirus is not global war; it will soon pass. Even so, maybe FDR’s words are fitting: “The only thing we have to fear is fear itself.”

Fourth, this pullback is not a “speculative bubble” bursting. The steep 2000 decline in markets, known as the “dot-com bubble,” resulted from excess speculation on new technology, the Internet. Narrow, rapid-fire, get-rich-quick investment led to unsustainable prices with little or no return, except via speculative up-bidding. When the bubble popped, reality returned.

That is not what we are seeing today – quite the reverse. Today, we have a stable global base – and strong US economy. We are experiencing broad, sustained, objectively sustainable growth, strong fundamentals across sectors – except energy. The underlying health of companies, banks, labor and capital markets, business, and consumer spending are sound.

Yes, the coronavirus has temporarily disrupted supply chains in China, which offers a chance to diversify US supply chains. But the disruption is temporary. Neither the US nor Chinese economies are likely to stop growing. Both are engines of growth. The US-China trade relationship was re-set, but every indication is that trade will continue apace, if not accelerate.

In the end, perspective is hard to hold when in the eye of a storm. That is where we are. Sources of panic are easy to find, fear a market-mover, even if the right answer is calm, optimism and foresight based on history. As quickly as this storm swept in, it may sweep out. When all is done, many will say we overreacted. They will be right. Until then, keep your eyes wide for shafts of sun.

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Larry V. Dean
1 year ago

Robert Charles, you make such good old Common Sense with your fact-based evaluation of how our economy has always worked in good times, bad times, and contrived times. Thank you for this most informative piece on what really goes on in our market based economy.

D. James
1 year ago

Great Article by Mr. Charles and valid points by Kim. This crisis will also pass. Stay steady, wash your hands frequently. Do not believe the mainstream Media scare tactics. They are subversive and kneel to the Democratic party. Always buy low and sell high. Keep the faith baby !

Kim
1 year ago

Some of us might be tempted to sell before we lose it all…BUT DON’T! Selling now, when the stock market is down, will chalk up a sure loss. And how would you know when to get back in? When it recovers? Then, you’re buying at higher prices!

As Mr. Charles noted, our economy is strong. For each of the last 2 months, over 1/4 million jobs were created. Consumer confidence is high.
As I told my family, this is a good buying opportunity. For those who didn’t enter the stock market before President Trump was elected and feel as though they missed the boat, consider beginning to purchase into a fund. A little now, a little more next week…
There is volatility, yes. But I think the long-term picture is rosy. Just make sure you have enough in a reserve fund, and diversify your investments. And vote for Trump.

PaulE
1 year ago
Reply to  Kim

Correct Kim. Right now the market is being impacted by two distinct forces: 1) The incessant fear mongering being orchestrated by the MSM and the Democrats to try and weaken both the economy and Trump ahead of the election. All to improve, in their warped, little minds, the prospects for a Democrat either taking the WH or the Dems flipping the Senate. 2) The Saudis and the Russians have been in a escalating tug of war for several months now over whom will wield the most power in the Middle East and thus control OPEC and the region as a whole. The Russians, backing Iran against Saudi Arabia, refuse to yield. So the Saudis have decided to open their oil spigots and collapse the price of oil world-wide to weaken the Russians.

All of this is transitory and people should not be panic selling at depressed levels. If anything, people should be scoping out the market of top companies to incrementally to invest in, over the next few weeks and possibly even next few months, at what and will be great bargain prices a year from now. I’ve successfully invested through every so-called market crash from the Fed induced crash of 1987 right through the Democrat policies that caused the crash of 2008. In each and every case, the right move as been to stay invested in the market, scope out where the market has become over-sold and then scoop up high quality company stocks at ridiculously low process. The MSM and the Democrats in every instance have been front and center fear mongering the public, while behind the scenes they themselves have been scooping up the bargains. Stop listening to the empty suits screaming “the sky is falling” and stay invested and vote for President Trump again.

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