Your Tuesday Dirty Dozen [CHART PACK]

Research

Mar 16

An old-fashioned bear doesn't stab you with a sword, as in the crash of 1987 and the mini-crash of 1989. It nicks you with a thousand cuts. ~ John Dorfman

Good morning!In this week’s Dirty Dozen [CHART PACK] we look at bear market stats, recessions, panic insurance buying, credit cascades and more. Let’s dive in…

***click charts to enlarge***

The NYSE Index is down 32% from its all-time highs just two months ago. As a reference point, the index fell a total of 35% over the course of the 2-year long bear market in 2000. The second chart shows every peak to trough drawdown of the NYA over the last 60-years.

This chart from BofA shows that this market peak to 20%+ decline has been one of the fastest in history.

Apparently it’s the 3rd fastest flip from bullish to bearish trend in history, outdone only by the market selloffs of 32’ and 33’ (chart via BofA).

The pain tends to linger following a 20% market drop. According to BofA, “The 25 bear markets from 1929 to-date saw corrections continue for 85 days on average (81 median) following the dip below 20% into bear territory on an average pullback of 18.41% (15.61% median)... While history does show us examples of quick turn arounds after moving into a bear market, the tendency is for pain to linger, with further downside, over the two to three months that follow the initial 20% drop”.

BofA notes the historical context of SPX bear markets since 1929, writing:

- Median peak-to-trough price decline of ~30% (we have seen 26.7%)
- Peak to trough trailing P/E compression of 18x to 12x (we are at 13.9x)
- Bear market historically lasted about a year and a half (it has been just over 3 weeks)
- Peak of market has generally preceded an economic recession (if one occurred by three quarters).
- EPS peaks have varied but have occurred on average two quarters after the market peak.
- EPS recessions (which have not occurred in every bear market) have seen an average ~20% peak-to-trough decline.

It’s looking ever more likely that this virus is going to push us into recession. Bloomberg’s Recession Probability Index is at its highest point of this cycle. It’s currently showing a 53% chance of a recession within the next 12-months. I’d say those odds are a bit on the low side too.

The average recession lasts 13-months according to Deutsche Bank.

The risks of a full-blown credit cascade (which I wrote about last week, here’s the link) are increasing. Even investment-grade credit spreads are blowing out and correlations are going to 1 as liquidity providers step back and de-risk their exposure.

In another sign of increasing investor panic, BofA’s GFSI Skew Index which measures investor demand for downside protection just hit an all-time high.

Companies with the most leveraged balance sheets have been getting hit the hardest. This list from BofA shows the top 30 S&P 500 companies with the most refinancing risks (ie, good potential short candidates).

There is some good news though and that is that the data shows China’s economy is slowly trending up to more normal levels of activity. A stable and growing China is needed to help put a floor under commodity prices.

And finally, you may have heard about the CEOs of US airline companies asking for a $54bn government bailout. Now, it’s understandable that airlines, one of the hardest-hit industries from this virus, would need some financing to help them weather the storm. But… at the same time, maybe US companies need to learn to keep a rainy day fund for such exogenous shocks. Instead of, say, spending “96% of free cash flow” over the last decade to buy back their own shares — which, just so happens to boost said CEOs takehome pay.