Market Update – Coronavirus (March 28th)

Equity markets ended the week up nicely. Having jumped by +17.5% between Tuesday and Thursday, the benchmark S&P 500 index ended the week up +10%.

Earlier on, I had said that although we are in a (health and) economic crisis, we are not yet in a financial crisis. However, in the middle of this month, we were getting close to slipping into one. I see the recent rebound in markets mainly as a reflection of the fact that, following recent aggressive Fed/government action, we have moved back, away, from that very negative scenario. It is not a sign that financial markets already see the way out of the Coronavirus crisis.

The following chart tracks the daily TED spread (3 month LIBOR / 3 month Treasury Bill) as a measure of the perceived credit risk in the US economy. LIBOR measures the interbank lending rate so as the spread between LIBOR and the T-bill rate increases, it shows an accelerating lack of trust between banks and a corresponding tightening of credit for all other counterparties. You can see that although the TED spread has increased considerably over the past few weeks, it is nowhere near the levels reached in the financial crisis of 2008.

TED Spread: 3-month LIBOR / 3-Month T-Bill Rate

Some investors and commentators have asked whether the recent jump in equity prices is the beginning of a market recovery. At this point, it is difficult to say. Very often, the market bottoming process involves short ‘bear-market rallies’ in which prices rise, sometimes even considerably, just to then fall back to previous, lower, levels.

Looking, for example, at the September 2008 to March 2009 period, you can see that there were two bounces in late October/November. Both amounted to around 17%. and both were erased thereafter (the market only finally bottomed in March 2009).

Dow Jones Industrials Index: September 2008 – March 2009

I wish you all a good week. Stay healthy.

Eran Peleg