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


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

Tayfun Coskun/Anadolu Agency/Getty ImagesThe coronavirus downturn differs significantly from past event-driven bear markets and stands to hit equities even harder, Goldman Sachs said on Tuesday.The firm analyzed 27 bear markets since 1880 to estimate this slump’s length and depth.Though stocks’ current level matches declines seen in past bear markets, factors unique to the coronavirus threat…

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 on Tuesday.
  • The firm analyzed 27 bear markets since 1880 to estimate this 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-fueled slide and past bear markets, from historically low interest rates to the pandemic’s unpredictability.
  • Visit the Business Insider homepage for more stories.

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

The bank analyzed 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 outbreak drove a plunge of “unprecedented nature,” and uncertainty around the pandemic’s future contributed to all-time-high market volatility, said Peter Oppenheimer, Goldman’s chief global equities strategist.

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, but it expects this one 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

Sgt. Amouris Coss/U.S. Army National Guard/Handout/Reuters

No event-driven bear-market example analyzed 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 outbreak’s economic fallout can’t be patched as simply, and the rapid jump in quarantine activity dulls the effects of governments’ usual stimulus measures, Goldman said.

“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.

Read more: Morgan Stanley studied decades of recession history to compile a playbook for what to buy during and after a stock bear market – and when to do it



Second-stage infections

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Past epidemics, such as SARS in 2003, 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 havens.

The stop to economic activity in Europe and the US will further harm markets before they recover, and 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 fueled 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 said.

Read more: A JPMorgan heavyweight who advises a $1.9 trillion business breaks down 3 investing strategies set to thrive right now – even as he forecasts ‘the virus is going to win’


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