Watching the stock markets over the past few weeks really makes me wonder about the savvy of investors. For each plunge there is a corresponding buyback. Some of these buybacks have been impressive. The Dow soared almost 2000 points on Friday. It's highest point increase ever. Unfortunately, the corresponding drop was even worse. On Monday the Dow plunged nearly 3000 points. Its lowest point drop in history. That's a net loss of 1000 points over two trading days. Yet, some traders are making a bundle buying at the dip and selling back at the peak, often during the same day.
After yesterday's buyback, you can expect a plunge of 1200 or more today, with the Dow dipping precariously close to 20,000. It hasn't been that low since Trump took office in January, 2017. It would erase all these great economic gains the Trump administration has gloated over for the past three years. Still, Goldman Sachs says the recovery will be quick once these coronavirus fears subside. I'm not so sure.
We don't know when the virus will run its course. It's not your typical flu bug that ends with the first warm weather. Coronavirus keeps spreading, while the typical flu bug has gone into hibernation for the warm months. Some medical authorities are now saying this virus could last well into the summer, which means the markets will continue to take massive hits with quarantines in place all around the world. How low can the stock markets go. If 2008 and 2009 is any indication, much lower than they are now.
During the market collapse that began in October 2008 and stretched to March 2009, the Dow lost 57% of its market value. We are about halfway there at this point. This means we could see the Dow drop to as little as 12,800 if 2008 repeats itself. That's a massive drop that will take months, not weeks to recover. It took four years for the Dow to regain its losses after that huge crash. So, Goldman Sachs is talking out its ass.
Even if we blame this massive market drop on coronavirus, it will take at least a year to assess all the damage it has caused. Assuming the virus goes into remission at some point this summer, it will no doubt come back with a vengeance in late fall, as viruses tend to do. This is not something that is going to be resolved anytime soon.
In the meantime, the government has to find a way to compensate all the businesses that have taken a massive hit during this time. Some will survive, others will fail. We will see a major reshuffling of the airline, tourist, and entertainment industries, which have suffered the worst. The problem, as Mohamed El-Erian points out, is that the Fed has fired all its ammunition at the beginning of this crisis, meaning it will have nothing left to deal with the crisis as it deepens. It's like the Fed is betting on this virus running its course over the next few weeks, and things will return to normal this summer.
Of course, that's the way Trump would like it. He's imagining a stock market rebound that will see it soar to whole new heights just in time for the general election, and this damn coronavirus thing will be forgotten.
It would be much smarter to assume this bear market will last several months and offer infusions at stages, not all at once. The same goes for traders. If you want to recover from a 2300-point drop, don't try to buy back all that stock in one day, especially in the last 20 minutes of a trading day, as was the case on Friday. Buy it back in increments, that way you are likely the stretch the rebound over several days. Instead, we saw a 3000 point drop on Monday, as the same investors immediately sold back their stocks to make a quick profit.
This kind of casino mentality is going to be the ruin of the markets. The panic has stretched into the commodity markets, with precious minerals taking huge hits as well. This means we are seeing a massive liquidation taking place with many persons feeling they need cash on hand to deal with the prolonged shutdown of businesses. Real estate prices are also dropping. So far the damage has been minimal, but it will get worse before it is all over. Gambling like this is not good for anyone, but I suppose with Las Vegas in lockdown and virtually all sports suspended, these gamblers have to find somewhere else to try their luck.
Sadly, the Trump administration has been encouraging this kind of behavior. You don't hear much from Kudlow anymore, who was pushing investors to buy on the dips when the plunge began. Mnuchin has launched a number of stimulus measures, which he hopes will put cash in the hands of Americans to weather the next two weeks of quarantine, but not much after that. Maybe if more money was going to health care services they could deal with the pandemic better? Instead, much of the White House thinking is centered on how to revive the markets.
We need to bite the bullet here and accept the fact that millions of Americans will get coronavirus. There is no practical way to contain it at this point. So far, the attempt has been to "flatten the curve" until more beds and respirators are available at hospitals to deal with the rise in patients. In other words, by putting everyone in lockdown medical authorities are hoping that they can spread the number of cases over a longer span of time so as not to overwhelm health care providers. The vast majority of victims will recover. Most of them quickly. The patients most at risk are the elderly, where the mortality rate is dangerously high as witnessed at this Kirkland nursing home in Washington.
Unfortunately, the Trump administration is incapable of long term response. What we are seeing is a pathetic attempt at damage control from Trump and his media surrogates. Unlike his awful response to Hurricane Maria, which ravaged Puerto Rico, this time the entire nation is being impacted. He can't sweep this virus under the rug, as much as he would like to.
What if anything comes out of it remains to be seen. Congress bickers over a relief bill with Democrats wanting more money for medical relief and Republicans wanting more money for businesses. What this pandemic has amply illustrated is how poorly prepared we were for it, despite having had similar scares in the past 10 years. This administration chose to disband the White House pandemic response team, making us all the more vulnerable for an outbreak like this. His administration is still insisting on cuts to the understaffed CDC.
It's little wonder we are seeing this volatility on Wall St, with the mixed messages coming out of the White House and no clear plan for how to deal with the crisis. The Trump administration is literally dealing with the outbreak on 15-day cyclical guidelines, hoping it will go away sooner rather than later.
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