Investors have studied everything from power consumption to the infection curve to figure out if this market rebound is a headfake after the coronavirus crash.
It may also pay to brush up on history -- where the signs look ominous.
For all the cheer spurred by unprecedented policy stimulus, U.S. financial conditions are behaving in ways that look eerily similar to 2008. If that pattern continues, it means at least one more bout of cross-asset pain is coming.
The Bloomberg United States Financial Conditions Index, a measure of stock, bond and money market stress, started this sell-off with a one-month plunge to the third week of March, before recovering about half of that in the month that followed.
That’s almost exactly the pattern the gauge followed during the credit crunch. Worryingly for 2020 investors trying to navigate the estimated $6 trillion pandemic-induced recession, in 2008 it went on to turn lower and declined for about one more month.
Of course, the circumstances surrounding this crisis are far removed from 2008. The world has not experienced a pandemic of this nature in living memory, and investors have not faced such a severe or rapid downturn in economic activity. Meanwhile the response from central banks has been faster and larger than anything seen before.
Even so, the similarities between conditions then and now will be ammunition for bears. It’s occurring as countries contemplate easing the lockdown measures to contain the outbreak -- a move which could unleash either an economic recovery or another wave of the virus.
“The risk of another equity drawdown has increased after the sharp rally,” Goldman Sachs Group Inc.’s Christian Mueller-Glissmann, head of asset allocation in London, said in an interview. “We are still to see the whole extent of the growth shock and potential second-round effects” of the virus, he said.
Mueller-Glissmann is one of a growing list of market pros fretting another leg down for risk assets.
Billionaire investor Carl Icahn told Bloomberg Television on Friday he’s hoarding cash and avoiding stocks as he prepares for the pandemic to wreak more havoc. The S&P 500 has gained based on an overly optimistic view of how fast economies can recover, he reckons, meaning shares are too expensive.
“It’s not like turning on a spigot,” he told Bloomberg’s Erik Schatzker. “The risk is too high for the reward in many, many companies.”
Bloomberg’s financial conditions index comprises nine measures including the Ted spread, muni versus 10-year Treasury spread and the VIX volatility index for the S&P 500. They’re compared against their mean levels before the Lehman Brothers bankruptcy in September 2008.
While the gauge has eased, some pain points remain. The spread between junk-rated corporate debt and corresponding Treasuries has been rising for the past week. Back in 2008, that measure steadied after the first month of the sell-off before ratcheting higher, even as other components like the Libor-OIS spread recovered.
Much of the stress in the system has so far been contained by the actions of the Federal Reserve, which has unleashed a torrent of support across markets, including in funding, municipal bonds and corporate debt. For optimists like Vasileios Gkionakis, the monetary actions alongside the reopening of economies means the worst may have passed.
“I believe we won’t get another dip like in 2008,” said the Banque Lombard Odier & Cie currency strategist. “We would need to see a serious setback in the infection curve for the lockdowns to remain place in Italy, Spain, the U.S., the U.K. and France.”
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