30th March 2020
Extraordinary: bear and bull market all in one month
It is the era of superlatives, the most frequent being “unprecedented”. The term is unavoidable and, I
suspect, carries a level of unease only comparable to what many of our grandparents must have felt
following the declarations of war that heralded World War II. Except that the state of emergency we find
ourselves in now is far harder to grasp than a conventional conflict situation.
Perhaps this is why this month stock, bond, currency, commodity and all other traded asset markets which
in aggregate we refer to a capital markets have displayed quite extraordinary dynamics. The week’s headline
is that over the course of March 2020 we experienced both bear market conditions due to falls in excess
of 20%, but also bull market conditions with some stock markets this week rising in excess of 20% over
three successive days of recovery. On Friday the rebound ended, and the week’s recovery now looks very
much like the sort of short-term bounce common during bear market periods.
Governments and central banks make sure the big wheel keeps on turning
After weeks of nosediving asset prices, the ‘whatever-it-takes’ attitude displayed by governments and
central banks this week has made a difference. The unprecedented level of support set in motion by
policymakers has rebuilt enough confidence among investors to send markets shooting up this week, even
though they are still showing very significant losses since the end of February. We are not out of the woods
yet as far as the bear market volatility goes (which we cover in more detail in the next article) but we can
be sure that, without the huge fiscal and monetary stimulus packages announced by governments and
central banks around the world, markets would still be trading as if there is no conceivable bottom to the
How do we pay for all this fiscal support?
To deal with the fallout from the pandemic, governments around the world have unveiled enormous fiscal
and monetary stimulus measures. In Britain, the government has pledged a £50 billion fiscal package in
addition to £330 billion in loan guarantees to support businesses and individuals during the tough times
ahead; importantly, this also includes a scheme to pay 80% of wages for companies in affected industries.
On Wednesday, the US Senate passed a bill promising $2 trillion to support its economy. The package
includes direct transfers of $1,200 to each citizen, beefed-up unemployment benefits and provisions for
those working in the precarious “gig economy”. If the bill passes the House of Representatives, at 9% of
total US GDP in 2020 (again including guarantees to businesses which may or may not be drawn) it will
easily become one of the largest spending plans in American history.
The anatomy of a bear market
After more than a month of sinking asset values, this week capital markets rebounded significantly (before
giving up some of the gains again on Friday). The key question is whether the moves we have seen represent
a sustained turnaround in market sentiment (and therefore, asset prices) or just a short bounce on the
As we wrote here before, the market carnage we have witnessed since the last few weeks of February has
already made equities and other assets cheaper in valuation terms, even taking into account the huge cuts
in earnings which are likely for this year. Market moves over the last few weeks have been driven more by
an extreme liquidity preference than very specific expectations of future earnings or values. And as such,
risk premia (the return for taking on a given level of risk) are high. This would normally act as a stabilising
force in markets, since those savvy investors who smell opportunity amid the crisis eventually come to
outweigh those running for the hills.