Goldman Sachs: 4 key differences make the coronavirus-fuelled bear market more worrisome than past slumps

New York Stock Exchange building is seen at the Financial District in New York, United States on March 22, 2020. The ‘New York State on PAUSE’ that executive order is in effect at 8 p.m. Sunday night, March 22nd. Tayfun Coskun/Anadolu Agency/Getty Images
  • The coronavirus downturn differs significantly from past event-driven bear markets and stands to hit equities even harder, Goldman Sachs said Tuesday.
  • The firm analysed 27 bear markets since 1880 to estimate the current slump’s length and depth.
  • Though stocks’ current level matches declines seen in past bear markets, factors unique to the coronavirus threat could drive prices even lower, the bank’s chief global equities strategist said.
  • Here are four key differences between the coronavirus-fuelled slide and past bear markets, from historically low interest rates to the pandemic’s unpredictable nature.
  • Visit the Business Insider homepage for more stories.

The coronavirus’s “one-off ‘shock'” dragged US stocks into bearish territory faster than any past tumble, and a handful of unique factors suggest it will be harder than usual to recover, Goldman Sachs said Tuesday.

The bank analysed 27 bear markets since 1880 to estimate how long and deep the latest downturn will last. Markets’ latest decline brought forth an event-driven bear market, the analysts said, as opposed to cyclical and structural declines seen throughout history. The coronavirus drove a plunge of “unprecedented nature,” and uncertainty around the pandemic’s future contributed to all-time high market volatility, Peter Oppenheimer, chief global equities strategist at Goldman, wrote.

Even after the Dow posted its biggest gain in 87 years on Tuesday, equities sit well below bullish levels as investors wait for the government to issue trillions of dollars in fiscal relief.

Past event-driven slumps saw stocks fall 29% and remain in bearish territory for nine months on average, according to the bank, yet it expects the coronavirus to buck the trend. Here are the four characteristics differentiating the current market from past event-driven slides, according to Goldman Sachs.

Read more: The ‘trade of the century’: 2 hedge fund managers break down a simple investing strategy built to profit from wreckage caused by coronavirus

Pandemic-sourced uncertainty


No event-driven bear market example analysed by the bank was driven by a global public-health crisis, and the lack of precedent leaves markets with few sources of optimism. Most downturns were prompted by market-specific events, allowing monetary policy to respond and directly ease stresses.

The coronavirus’s economic fallout can’t be patched as simply, Goldman said, and the rapid jump in quarantine activity dulls the impact of governments’ usual stimulus measures.

“Interest rate cuts may not be effective in an environment of fear where consumers are required, or simply inclined, to stay at home,” Oppenheimer wrote.

Historically low rates

Chairman of the Federal Reserve nominee Jerome Powell testifies during his confirmation hearing before the Senate Banking, Housing and Urban Affairs Committee November 28, 2017 on Capitol Hill in Washington, DC. Alex Wong/Getty

Even if rate cuts could effectively lift the economy from its virus-induced decline, the recent bear market arrived as interest rates already sat at historically low levels. The position left central banks like the Federal Reserve with little room to enact “effective policy response,” Oppenheimer wrote. The situation is increasingly dire in countries with negative rates, an economic experiment with little known about its long-term side effects.

Second-stage infections

People wear face masks as they attend the live-broadcasting of Pope Francis’ Sunday Angelus prayer during the Coronavirus emergency at Saint Peter’s Square, on March 8, 2020 in Vatican City, Vatican Antonio Masiello/Getty Images

Past pandemics such as 2003’s SARS saw equities markets quickly bounce back from their lows once the rate of infection in secondary outbreak sites slowed. While China has effectively curbed contagion within its borders, escalating outbreaks in the US, Italy, and Iran prompted fresh selling as investors traded risk assets for safe havens.

The stop to economic activity in Europe and the US will further harm markets before they recover. Historic amounts of fiscal stimulus will be required to keep the event-driven bear market from turning into a prolonged downturn, Goldman said. The rebounds seen after past crises were fuelled by consumers’ quick return to regular activity, and such recovery amid the coronavirus pandemic is unlikely, according to the bank.

“The fear factor around the economic shock from preventative measures may push markets down further in the meantime,” Oppenheimer added.

Widespread lockdowns

FILE PHOTO: Empty street is seen in Manhattan borough following the outbreak of coronavirus disease (COVID-19) in New York City Reuters

The lockdowns taking place around the country to prevent further contagion will place a larger-than-usual pressure on earnings than seen in past bear markets, the bank said. Such a hit to quarterly profits “does not necessarily mean that markets cannot rebound sharply,” but it suggests markets will fall further before turning higher, Oppenheimer wrote.

The strategist remains hopeful markets will return to past levels quickly once the virus threat subsides, and pointed to employment levels as the biggest risk moving forward. A jump in unemployment would likely usher in a long recession, Oppenheimer wrote, while a resilient unemployment rate would set the economy up for a healthy recovery in the second half of 2020.

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