Apr 23, 2020 - Economy

The worst for the stock market may be yet to come

Data: FactSet; Chart: Naema Ahmed/Axios
Data: FactSet; Chart: Naema Ahmed/Axios

The U.S. stock market closely tracked its performance from 2008 following the first major decline of the bear market this year, but has now diverged greatly.

What's happening: Comparing the period of 31 market days starting from Sept. 29, 2008, to the same period beginning March 9 this year, the S&P 500 has fallen by much less than it did, despite expectations for this to be a far more damaging recession.

  • Those dates are effective markers because both were the first time the S&P fell by 5% following respective economic shocks (Lehman's bankruptcy and coronavirus), DataTrek Research's Nicholas Colas says in a note to clients.

Why it matters: The big difference was the response of U.S. policymakers.

  • While Congress didn't introduce TARP until October and the Fed didn't take rates to zero or introduce quantitative easing until November, this time around the Fed swung into action well before the first major market crash.
  • "In 2008, the 'it’s going to take longer to fix things than we thought' moment was the November election," Colas says.
  • "Markets understood they would have to wait until 2009 for fiscal stimulus (ARRA passed in Feb 2009). From Election Day to the lows for the year (12 days later) the S&P 500 fell 25.2%."

That moment may still be to come in this recession, Colas warns.

  • "Overlay 2008’s day-by-day experience on to 2020 and you get an 18% decline in the S&P 500 over the next 8 trading sessions."

Watch this space: Bank of America analysts predict the S&P is headed for new lows based on patterns in the VIX, or the stock market's volatility gauge, from 1987, 2002 and 2008.

  • They predict the S&P will top out at around 2,960, about 160 points above its current level, before falling through the March 23 low in the coming weeks.
  • Volatility markets are "underpricing the risk of a secondary market shock," they say in a recent note to clients.

Go deeper: The stock market's demand disconnect

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