How to Tell When Markets Finally Reach a Bottom
Jim Bianco, Bloomberg, February 27, 2020
(Bloomberg Opinion) -- It’s said that the most expensive words on Wall Street are “this time is different.” But this might be one of the few times where the phrase applies.
Most of the rapid selloffs in equities in the post-financial crisis era were stemmed by forceful central bank statements, such as when then European Central Bank President Mario Draghi said in 2012 that he would do “whatever it takes” to save the euro during the height of the region’s debt crisis. Or, when current Federal Reserve Chair Jerome Powell made his “dovish pivot” in early January 2019 by saying the central bank would be “patient and flexible” when it came to considering future interest-rate increases.
But what makes the current plunge different is that it’s being driven by an event — the threat that the coronavirus will become worldwide pandemic — that is out of the control of monetary policy makers and Wall Street. So, there is unlikely to be some “magic” headline that scrolls across the computer screens of investors and traders that says it is over. Maybe the news of a novel vaccine or effective treatment would do the trick, but medical experts generally say none is on the immediate horizon.
In order to compensate, markets must discount all current and future bad news. So, the market has to price in more infections, more border closures, wider travel restrictions, more and larger quarantines, and the potential for a widespread outbreak in the U.S. that leads to mass cancellations of gatherings and closures of school and work sites. The market also has to discount longer-term effects from de-globalization, lingering supply chain disruptions, an uneasy public that loses faith in government and other official institutions, as well as a return of the virus this fall.
The way to tell whether the discounting has been fully reached is when the market stops reacting negatively to every bad headline, which has yet to happen. But once it happens, the market can truly bottom and begin to recover when some of the expected negative events fail to materialize, even though it may rally in the face of other “bad” news it already discounted.
What is preventing this from happening? Two things. The first is a disbelief or lack of urgency about the scope of the coronavirus problem. This lack of panic takes many forms, with the most common being the refrain that this is “just the flu.” Seasoned market watchers should be reminded of similar dismissals in late 2007 that “subprime is only 2% of mortgage market.” One exception is the Chinese government, which did not shut down its economy and quarantine hundreds of millions of people because they are needlessly panicking. Those actions signal a seriousness that the rest of the world should not dismiss.
The second is the Federal Reserve. The foundation of the post-crisis period has been that accommodative monetary policy rides to the rescue of every market decline. So, a parallel discussion that is going on is whether the Fed will cut interest rates at its next monetary policy meeting that ends on March 18. Data compiled by Bloomberg show the probability of a reduction in the Fed’s target rate at that meeting is slightly better than even money.
In other words, hope is at a fever pitch that easier monetary policy can help stabilize markets. But, again, the coronavirus is not a problem that easy money, either via lower rates or additional asset purchases, can fix. Such actions will, at best, only temporarily support markets, but they won’t prevent them from reaching a true bottom.
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This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Jim Bianco is the President and founder of Bianco Research, a provider of data-driven insights into the global economy and financial markets. He may have a stake in the areas he writes about.
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