The strong and sharp sell-off in stock markets triggered by the coronavirus pandemic in February / March 2020 seems to have ended. Technical analysis suggests that the bear market in stocks has fully reversed as the S&P 500 Index has recovered to trade above its 200-day moving average and the psychological round number at 3000. The 2020 market crash seems to have been a temporary phenomenon, like the market crashes of 1987 and 1998.
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On 19th February 2020 the U.S. stock market hit an all-time high, as measured by the benchmark S&P 500 Index. Within only 15 trading days, the Index crashed and dropped by more than 20% in value from its high. This was the fastest stock market crash to happen in the United States at any time in the last century, surpassing even the speed of the great stock market crash of 1929, which took 30 trading days to complete a 20% decline from its high. A 20% decline from a peak is the traditional definition of a bear market, and when it happens very quickly, it can fairly be described as a crash.
The stock market crash of 2020 has not only affected the United States, but also every stock market in the word. Most markets and market indices have seen peak to trough declines of more than one third in value, although these declines were followed by rallies to higher levels, but at the time of writing barely one-third of the total declines were recovered.
The big question for traders and investors is whether stock markets are likely to fall further to new lows, and if so by how much; or begin a process of recovery without breaching the recent lows, which would suggest now is the time to buy stocks. In fact, this is a question for everyone, as the health of the stock market can have a direct impact upon the health of the “real” economy, earnings, and unemployment too. We can try to answer this question by looking at two factors: what has caused the stock market crash of 2020, and how it compares to other market crashes that have occurred within the last century.
Causes of the Stock Market Crash 2020
The obvious primary cause was the global coronavirus pandemic which spread from China to quickly reach the heartland of the G7 nations in Western Europe and North America. A highly infectious disease with no cure which initially appeared to have a mortality rate between 2% and 4% was an extremely alarming event with no true precedent in developed nations since the Spanish Flu Pandemic of 1918. This singular reason placed the initial market panic in a unique psychological category and certainly contributed to the crash’s strong speed and intensity. The unique situation makes it difficult to compare this crash to historical stock market crashes.
There are two major secondary causes which are often cited: an oil price war between Russia and Saudi Arabia, which may be seen as the fire which first lit the gunpowder, and the fact that there had simply been a very long-running and heavily extended bull market run which had seen stocks strongly increase in value since President Trump was elected in November 2016, which was due at least a strong correction. Markets were widely seen as “overbought”.
These causes may be compared later to the perceived causes of historic stock market crashes to help determine what historical precedent is most likely to serve as a good guide to what will happen to the stock market over the coming months and years.
Technical Comparison of U.S. Bear Stock Markets From 1929 to 2020
A bear market can be defined by a drop in value by a major market index of at least 20% from peak to trough. It is also helpful to only select peaks which are all-time highs, as there can be no conceptual doubt that a market is bullish when it is making a new all-time high price. By these criteria, there have been 13 bear markets since 1929, including the bear market which began in 2020. The crucial statistics of all these bear markets are presented in the table below, ranked downwards in decreasing order of severity as measured by total peak to trough decline. We can see that the bear market of 2020 (highlighted in yellow within the table below) is already the seventh most severe bear market since 1929. Of course, we do not yet know how long this bear market will last for or how severe the worst peak to trough decline will be.
U.S. Bear Markets 1929 - 2020
From this technical analysis comparison, a number of conclusions can be drawn:
The 2020 bear market saw the fastest bull to bear market transition seen in more than a century.
Only one other bear market saw a drop of 2020’s magnitude without going on to make a peak to trough decline of at least 50%.
The two most recent bear markets, seen since 2000, each produced maximum peak to trough declines greater than 50%. It may be that the volatility of crashes has tended to increase over recent decades due to new technology allowing for instant remote trading and high-frequency algorithms, which probably accelerates and exaggerates market movement.
Of the four worst bear markets, three of them took at least 185 days to develop. Bear markets which developed very rapidly tended to suffer less severe ultimate declines. This presents an a more optimistic case for stock markets 2020 and 2021.
From the data presented above, no clear conclusion can be drawn about the likely ultimate severity of the 2020 bear market. However, a technical analysis of prices might give some technical indicators which could be useful precedents.
Forecasting the Development of the 2020 Stock Market Crash
Bear markets in stocks tend to move down more quickly than bull markets move up. Additionally, once markets make strong falls beyond a 20% decrease from peak, if they are going to continue downward to make new lows, they rarely retrace beyond 50% of their full decline. They tend to make significant lows which hold for a while, which are then broken to the downside strongly, giving a reliable bearish signal. We can apply these principles to the 2020 price action shown in the monthly chart below of the S&P 500 Index.
S&P 500 Index Monthly Price Chart 2020
The peak to trough movement of February and March ran from approximately 3400 to 2200. This means that the heuristic (mental) anchoring of the 50% retracement “tipping point” will be seen at 2800. If the market can make a first monthly close above 2800 without making a significant break below the current swing low just below 2200, that would be a bullish sign and suggest that the low will not be tested again. Another reason why the 2800 level is technically important lies in the fact that it is very close to the point at which this market completed its initial 20% drop from the peak in February 2020.
Another bullish sign would be the first month-end close higher than the closing price made six months previously.
The Index has succeeded in getting established above 2800 which is a bullish sign. However it should be noted that some bear markets have seen retracements up to 61.8% before going on to plummet to new lows, so as long as the price trades below the 3000 area a further move down to new low prices is possible. This 3000 area should be watched carefully, as we see a confluence there between the a major round number, the 200-day simple moving average, and the 61.8% Fibonacci retracement level at 2937.
The 2008 Stock Market Crash
The monthly price chart below of the 2008 stock market crash, which actually began in 2007, is shown below.
S&P 500 Index Monthly Price Chart 2007/08
The second month of the initial decline (marked by the candlestick above the up arrow) produced a low which held for more than one month before being broken. This reinforces the importance of an initial trough low which is then tested after some time elapsed after a considerable retracement. It is not marked, but it is observable that there was no monthly close above the initial 50% retracement level.
After several months went by, there was a strong bullish retracement, which peaked at the candlestick marked by the down arrow. Note that this candlestick was not able to make a monthly close above the 50% retracement level, and the market went on to make further new lows and a long-term price decline.
The 2001 Stock Market Crash
This bear market took a relatively long time to develop from the market peak in 2000, but once the 20% decline was reached, the price never came close to making a 50% retracement of the downwards move from the peak. This adds weight to the argument that the price holding above the running 50% retracement level is a very crucial indicator of whether the bear market has further to run.
The 1929 Stock Market Crash
The same thing happened in the 1973 bear market, and also in the 1929 stock market crash. After the first few months of the worst stock market crash ever, early 1930 saw the price rally to just above 25 after rallying from the short-term low at about 20, which was the 50% retracement area from the downwards move from about 30 to 20. However, the 50% retracement was again respected.
Fundamental Comparison of Stock Market Crashes
There are firm technical reasons to think there is a reasonable probability that the 2020 bear market will extend in scope to rival the great bear markets of 2008, 2002, 1973, and even the early 1930s, if the S&P 500 index will struggle to get established above 2800 and trades decisively below 2200. However, a comparative analysis should also examine fundamental conditions prevailing as these bear markets developed.
If we start with the worst case, which began in 1929, the consensus view is that the problem began with the initial market crash, which triggered a liquidity crisis due to the over-exposure of financial institutions and governments, which then led to a massive reduction in demand. The crash of 2008 was similar, but demand was preserved due to a coordinated program of massive government borrowing disguised as other measures. The 1973 crash was arguably different, being widely seen as the result of an emerging recession rather than the cause of it, with the recession being caused by the collapse of well-established structural factors such as cheap oil and the Bretton Woods agreement.
There have of course been stock market crashes which were sudden and severe, but where the price bounced back very quickly, such as 1987, 1990, and 1998. These are worth studying because in each of these cases, it can be argued the crashes were caused by singular events which were quickly seen to be no big deal after an initial flash of alarm. The crashes of 1987 and 1998 were long-overdue corrections caused by very overbought markets primed for institutional debt contagion – both saw extremely speedy recoveries continuing to become strong bull markets. The crash of 1990 was caused by Iraq’s shock invasion and annexation of the state of Kuwait, which caused alarm as it raised the prospect of a serious disruption to Gulf oil supplies, major environmental damage, and the then almost unthinkable prospect of a major war involving the United States. In fact, the first Gulf War was a relatively minor event for everyone outside Iraq and Kuwait, and markets recovered quickly.
There are fundamental factors suggesting the crash of 2020 will be as severe as what began in 1973 and maybe even 1929.
Economic Impact of the 2020 Coronavirus Pandemic
At the time of writing, it is becoming increasingly clear that the world in general, and the G7 and G20 more developed nations in particular, will suffer a very serious economic impact from the coronavirus virus pandemic. The question is how quickly the pandemic might be brought under control and struggling economies resuscitated.
Before April 2020 began, major financial institutions were already predicting a U.S. unemployment rate beyond 32% and an annualized drop in GDP of 23%. The problem is not that the coronavirus is especially lethal, the problem is that in most of Europe and the U.S.A. the virus got out of control, civilized societies will have to protect their population even from a presumed mortality rate of about 0.8%, and the cost of this protection will be a massive economic semi-shutdown which is bound to last for several months even in a best-case scenario. This will result in the destruction of wealth, businesses, capital, and require an enormous extension of government debt to maintain a lockdown, which is already at an all-time high in global terms. This may be mitigated by the fact that nearly all affected governments have acted very quickly to loosen monetary policy and borrow or print money heavily to support their affected populations. However, that raises the question of whether such an endless extension of debt is sustainable. Even worse, it may that several months of lockdown will not be sufficient to finish off the virus, which could come roaring back at a later date, with no guarantee that a vaccination will be found.
It is hard to believe that even in a best-case scenario, where the G7 nations manage an effective lockdown for 2 or 3 months only and reflate their economies by an act of unified political and social will, there will not be enough damage to push stock market prices to lower lows than have already been seen. This should become obvious by the end of May 2020 at the latest, and the market’s acceptance of that will be signaled by the S&P 500 Index trading firmly below 2200. In that event, it will be likely to fall to at least 1750 by the end of 2020.
Will the market crash in 2020?
The market has already crashed in 2020. The S&P 500 Index fell by almost 37% from its all-time high in February 2020 over only five weeks, and all the major stock market indices of the G7 group of nations fell by more than 20% over the same period. A further crash is very unlikely.
How much will stocks go down in 2020?
It is looking likely that most major stock market indices, particularly the S&P 500 Index, will actually go up and end the year higher.
How long will it take for the stock market to recover?
The U.S. and most other stock markets have regained almost all of the ground lost during the stock market crash of spring 2020.