• Market Crumbs

The Dow Enters A Bear Market, But Is It Really That Surprising?

Image via Anna Tremewan on Unsplash

On March 6, 2009, the Dow Jones Industrial Average marked its bottom at 6,469.95, kicking off an 11-year bull market. Yesterday—4,024 days later, the Dow's amazing run came to an end as the index officially entered a bear market, closing 20% below its high of 29,568.57 on February 12. By doing so in just 19 trading sessions, the Dow entered a bear market in the shortest amount of time in history.

The S&P 500 and Nasdaq, which are more broad-based indices, finished yesterday roughly 19% below their highs. As the effects of the coronavirus weigh on the markets, the S&P 500 and Nasdaq are likely to enter a bear market as well.

During the bull market, central banks fought every blow to the market using monetary policy tools. With the coronavirus, though, markets are shrugging these moves off as the reality sets in it can't be resolved by central bankers. The markets shrugged off the U.S. Federal Reserve's emergency interest rate cut last week. Markets subsequently shrugged off the New York Fed's decision to increase its overnight repo operations to $150 billion from $100 billion on Monday and again, yesterday, to at least $175 billion.

While the recent decline in the markets can be attributed to the coronavirus, which is the epitome of a black swan event, the signs were there all along that the risk/reward didn't favor those who continued to pile into risky assets.

Of course, risk-takers have had the upper hand for the last 11 years over those who weren't as optimistic about the markets or the economy, but at this point it's worth going through some of the signs that, coronavirus or no coronavirus, were flashing red in recent months.

CEOs began heading for the exits at a record pace last year, continuing to do so this year. While not all exits were voluntary, it begged the question for those that did leave voluntarily, why would so many CEOs leave so abruptly if everything was going so well?

The rate at which the average investor could buy stocks was growing alarmingly fast. Whether through commission-free trading, fractional shares or even the U.S. government floating the idea of encouraging people to buy stocks, why wait until more than ten years into the longest bull market in history to give people this opportunity? As one Twitter user said so accurately, "Unloading stocks on the public at the highs is a process, not an event."

There were other signs—such as a Barron's article about how the Dow could hit 30,000 five years early, just a few weeks before it topped at 29,568.57. Then there was the WSJ article about people trading in their DOW30K license plates for DOW40K license plates. The record number of 401(k) millionaires also served as a warning sign that markets may have gotten ahead of themselves.

On February 19, which is the day the S&P 500 topped, two tweets could very well go down as ringing the bell at the top if markets don't recover. U.S. President Donald Trump tweeted "Highest Stock Market In History, By Far!" CNBC's Jim Cramer tweeted "what the hell is happening? Where are the sellers??"

There were countless other signs, such as 18 months of pumping a trade deal that didn't accomplish anything but gains in the stock market, a weakening global automotive industry, a weaker labor market than it appeared, farmers struggling and record inequality.

No one knows where markets go from here. It could end up being another generational buying opportunity or it could lead to a recession or worse, a depression. Maybe it is, in fact, different this time, or maybe it isn't.

While the coronavirus is rightfully blamed, it has brought attention to much of what has been ignored and led to an accelerated response in the markets, as seen by the record move from all-time highs.

The effects of the coronavirus go beyond finance and shouldn't be taken lightly as people have died and had their lives altered. Whether you're bearish or bullish, you can agree that this is hopefully resolved as sooner rather than later.

Leftover Crumbs

  • Refinancing continues to surge. After last week's 26% jump in mortgage refinance applications from the prior week, the latest data from the Mortgage Bankers Association showed mortgage refinance applications jumped another 79% last week as homeowners took advantage of record low mortgage rates. That represents a 479% increase from the same period a year ago, and the highest level of refinance activity since April 2009. Total mortgage application volume jumped 55.4% from the prior week, representing a 192% increase from the same period a year earlier. The share of mortgage refinance applications to total applications jumped to 76.5% from 66.2% the prior week.

  • A bad day for Boeing. Shares of Boeing got absolutely clobbered yesterday, falling more than 18% to their lowest level since July 2017 following a slew of negative headlines. Boeing initially sank after news broke the company plans to draw on the rest of a $13.8 billion loan, possibly as early as Friday. Shortly thereafter, Boeing announced it had received more cancellations than new orders last month, bringing total net sales for the year to 28 cancellations. Boeing also announced it will freeze hiring and limit overtime in a move to cut expenses. Lastly, Boeing announced three of its employees in Everett, Washington have contracted the coronavirus.

  • The Fed is looking beyond economists. The U.S. Federal Reserve is seeking the advice of epidemiologists as it tries to understand how the coronavirus may impact the economy. "I am talking extensively to epidemiologists and healthcare experts across the country...to try and interpret what we are seeing and what we are likely to see," said Dallas Fed President Robert Kaplan. The number of coronavirus cases is likely to be a key factor in determining the Fed's response and economic forecasts at next week's policy meeting.

  • More oil coming to market. The United Arab Emirates is following in the footsteps of Saudi Arabia by raising output as the oil price war with Russia continues. The two countries' increased output amounts to 3.6% of global supply. ADNOC, the national oil company of the UAE, said it would increase supply to more than 4 million barrels per day (bpd) in April and accelerate its 2030 target of producing 5 million bpd. Meanwhile, Russia said it may increase output by 300,000 to 500,000 bpd despite Russian Energy Minister Alexander Novak saying increasing production is "not the best option."

  • PepsiCo is looking for a boost. PepsiCo announced it will acquire energy drink maker Rockstar Energy for $3.85 billion. PepsiCo has had a distribution contract with the company since 2009 that prohibited it from making energy drinks or partnering with other energy drink makers. "As we work to be more consumer-centric and capitalize on rising demand in the functional beverage space, this highly strategic acquisition will enable us to leverage PepsiCo’s capabilities to both accelerate Rockstar’s performance and unlock our ability to expand in the category with existing brands such as Mountain Dew," said PepsiCo Chairman and CEO Ramon Laguarta.